Recently, we compared Exxon Mobil Corp. (XOM) to its industry competitors, Chevron (CVX) and Royal Dutch Shell (RDS.A) (RDS.B), and tracked the latest investment status of each. Today, we are going to compare BP (BP), PetroChina (PTR) and Total (TOT).
This article will cover the major internal and external risks associated with these companies and to analyze the strategies they might use to mitigate those risks while keeping investors happy. The article also provides a conclusion on "BEST BUY" for year 2013.
PetroChina hopes for a revival after China revised gas prices upward in three years
PetroChina's margins on the Natural Gas segment will increase by 15% after China revised its Natural Gas prices upward. According to PetroChina's President , Wang Dongjin estimates that profitability will grow by $3.27 billion from 2014 onward. PetroChina's six month production of Natural Gas recorded at 1.332 trillion cubic feet, up by 8.2% from 2012, which is 65% of China's Natural Gas output.
This article has taken the impact of this news and made its analysis to see the effect on the PetroChina Natural Gas segment and the impact on overall income.
In billion cubic feet
Output and Reserves
Marketable natural gas output
Reserves of natural gas*
*Proved developed and undeveloped natural gas reserves
Gross Margin on PetroChina Natural Gas segment
In millions of U.S. Dollars
PetroChina's gross margin on the natural gas segment has drastically gone down the year ending 2012 compared to the previous year's gross margin of 9% to -1%. This is due to the higher purchase prices of natural gas. Revision of natural gas prices had started making an impact since July 2013 and ever since. As per my estimation, the company's forecasted gross margin on the natural gas segment would be 4.00% to 4.50% until Dec 2013 and would take a full year to have any impact from 2014 onward.
Revenue from Segments
The natural gas contribution to total revenue was 5.63%, which, relatively speaking, is a small sized segment. However, due to increases in margins, the segment contribution to the bottom line would have a positive impact. The company's major revenue contributor was its downstream marketing segment, being 50.57% of the total. Unfortunately, the segment which holds the larger chunk of a pie contributes the lowest to PetroChina's net income with having only a 2.8% gross margin in 2QCY13. The major earnings are generated from the company's exploration and production segment, which contributes 30.6% to its bottom line. The second largest contributor in the year 2012 was the refining and chemical segments, having a 23.36% share. I expect PetroChina's natural gas segment to revive amidst recent changes in gas prices that will favor PetroChina's overall earnings going forward.
Gulf of Mexico Oil Spill Mellowing Down (British Petroleum)
BP's relentless efforts to support its completion of the operational clean-up are now ramping down. In May and June of 2013, the extensive three year clean-up efforts had contributed another $1 billion to the fund established in agreement with state and federal Trustees. BP announced 38 projects totaling approximately $665 million for this clean-up operation.
Much concern developed in investors' minds in connection with the recent macro opportunities favoring oil companies and whether or not BP will reap any benefit out of it or if the unpredictable claims will erode the company's earnings. I will analyze the facts and support my investment decision based on that.
Net Margin Ratio:
In millions of U.S. Dollars
My estimation is based on the most recent quarterly results of BP that reported gross revenues of $202,918 million. The company's operating revenue had decline marginally by 0.50%, whereas company booked a gain on the sale of assets - up by 87% from $1,675 to $12,777 million in the same period last year. This is known as a one time gain and carries insignificant contributions towards long term growth. I have estimated global demand for oil up by 5% to 7% percent in year 2013-2014 and my estimation are based on those numbers.
BP is still exposed to major risks of unpredictable claims from the oil spill that are yet to be ascertained. The company was gradually making monetary provisions in the accounts, so let's see how much the company has paid so far while entering into year three of clean-up operations.
Provision movements and analysis of income statement charges
In millions of U.S. Dollars
Here is the game changer. BP had already made a provision of $30,261 million for the year 2010 and also created a trust to settle claims and to establish additional clean up operational projects.
If the undetermined claims are settled under this provisioning amount, the company would not have to take a negative hit on its income. Otherwise, the company would not be able to take advantage of the global demand for oil in future. Here, in the above account summary, you can see that the company's cost charged directly to the income statement is reduced and I expect the company to complete its clean-up operations in the first half 2015 and settle all claims.
"Total" Geographic Expansion
Total signed an agreement worth $130 million with Bolivia's state energy YPFB to develop a natural gas area in the southern part of the Andean nation. This news was published by (Reuters)
YPFB will have a 55% stake in Azero. The identified field has proven 11.2 trillion cubic feet of gas reserves.
Lets analyze the facts and see the strategic growth of Total in terms of geographic expansion and then measure the viability of the existing and potential growth of the company expanding in new geographic regions.
The chart below depicts that Total's operating cash flows are consistently increasing, which allows the company to explore and enter into joint ventures in new geographic locations. On the average, the company's cash flows grew by $30 billion dollars as did the company's net investment in existing and new projects. The company projects its operating cash flows to surpass $40 billion on average in 2017.
Geographical Region of Upstream Segment
Total's major investments in Africa and Middle East totaled up to 52%, with these region's under severe geopolitical risks. The company is facing a volatile political situation in those regions, as Arab uprisings includes Syria, Libya, Egypt and Saudi Arabia - regions that are more risky for operations for the company at this moment.
Stock price movement
The stock has fully incorporated the news of the joint venture, touching its low of $46 in mid April 2013 and bouncing back to $56. The stock is riding on a high dividend yield and low multiples. Recovery from the global recession would have a positive impact on the company's earnings and I see a further upside on this stock moving forward.
Based on the facts above concerning the three companies, my "BEST BUY" for the year 2013 is British Petroleum. The reason behind my pick is that the magnitude of the risk on the Gulf of Mexico Oil spill is reducing as the company is managing the risk effectively and had taken the maximum provisioning of the asset in 2010. There are still unpredictable claims ahead, however, and the company has taken precautions to preserve the stockholders equity by making provisions time to time. On the other hand, if we look at the financial highlights of BP, the Price to earnings are lower than its competitors The price is riding on a high dividend yield and also the prime factor is the return on equity which clocked in at 21.41%.
I maintain my BUY stance on British Petroleum.