"The major integrated [energy companies]are just too large to be able to grow their reserves at anything other than a treadmill pace." (Jim Cramer, Financial Commentator and Analyst, Nov. 1, 2013)
Chevron (CVX) reported its earnings on Friday November 1st and investors didn't like what they heard concerning the company's spending in the 3rd quarter. CVX spent $10.6 billion in 3 months and it even outspent Exxon (XOM) by $100 million. Chevron's CFO Patricia Yarrington said during the conference call that CVX's spending this year would finish 10% higher than planned.
Ms Yarrington said spending would settle down once its huge Australian liquefied natural gas projects are out of the way. If you want to learn more of the details CVX's 3rd quarter earnings click here.
Both CVX and XOM are burning through record levels of cash as they invest in massive projects aimed at boosting their oil and gas output. XOM has still spent more than CVX through the first nine months of 2013, $32.6B vs. $28.9B.
This is part of the reason for the disappointing news that net income fell 6% in the quarter. "Our third quarter earnings were down from a year ago," said CVX Chairman and CEO John Watson, "primarily reflecting lower margins for refined products in the current period."
"We continue to make good progress on our major capital projects," Watson added. "Construction continues, and important milestones are being reached, on our Gorgon and Wheatstone LNG projects in Australia."
The CEO added, "Important interim construction goals have been recently reached for our Jack/St. Malo and Big Foot deepwater projects in the Gulf of Mexico, in preparation for their project start-ups scheduled for late 2014. We are also moving forward on the development of our liquids-rich unconventional properties in the U.S."
Chevron's Stock Price is in Decline, and Here's the Proof
Since a picture (or a chart) can paint a thousand words, let's take a look at this one-year chart of CVX's share price. Notice the moving average price periods that have been penetrated to the downside.
So in spite of the fact that CVX earned $5 billion, or $2.63 a share in the third quarter its stock is down almost 8% from its July 25, 2013 (52-week high) price of $127.83. It closed on Friday, Nov.1 at $118.
On a bright note the last time CVX's stock price broke below both its 50-day and 100-day price average it found support just above $115 as it did on Oct.10, 2013. So a buying opportunity may be close at hand.
Yet oil prices have been in decline as well and inventories of West Texas International and Brent crude are beginning to rise quickly. The high unemployment numbers and persistent weak spots in the American economy has dampened fuel consumption as motorists reduce usage.
Real Money Contributing Author Jim Cramer, after learning of the 3rd quarter results for CVX and the subsequent ongoing share price correction, described an unnerving trend for both CVX and XOM.
"This kind of [price] action with the majors is happening far too often. It's a disturbing trend, because this is an amazing time to be in the oil business, as we know from our domestic companies' numbers.
"But the major integrateds are just too large to be able to grow their reserves at anything other than a treadmill pace."
The questions investors are asking is how will it impact the share price and dividends?
Both CVX and XOM are historically mindful of how much dividends and stock buybacks mean to shareholders. Both sport dividend yields that are above average and both have the cash to increase the payouts.
At $115-per-share CVX has a dividend yield to price of 3.48% which is sustainable because it represents a payout ratio of only 30% of operating income. Before discussing Exxon's dividend, consider this 1-year chart of XOM with the same moving average price lines.
Exxon's Stock Price Is Recovering
This chart is good news for XOM investors and those thinking about adding this energy colossus with a market cap of over $395 billion to their portfolios. XOM's share price has penetrated all the upside resistance levels, and when that happens the stock usually rallies higher.
If we're fortunate enough to see the stock have a small price pullback like it did on Oct.25, 2013 and we could snag some shares at $87,the yield to price rises to 2.9%. This also points to one reason some investors boycott XOM. It's dividend is almost 17% lower than CVX's.
Exxon's payout ratio is also modest at 29%, and it's high time it steps up to the plate and raises the dividend to CVX's level. After all XOM's 3rd quarter 2013 earnings improved by over $1 billion from the year ago quarter.
Total 3rd quarter earnings by segment is nicely illustrated in the following graph provided by the company.
What's the Total Return Upside Potential for CVX and XOM?
Let's take XOM's current 52-week high of $95.49 as a realistic 1-year price target. Including the 2.9% current dividend, a conservative total return for shareholders who buy at an average price of $88 is 11.4%.
Good enough but not what an analyst would call high growth potential. CVX's 1-year target price according to a consensus average estimate of the analysts who follow it is $132.60.
If an investor buys with an average stock price of $117 and factors in CVX's 3.48% dividend the total return, the 1-year upside potential is nearly 16.8%. That's a 5% better total return potential than XOM, but not spectacular either.
In the final analysis I agree with Jim Cramer's conclusion about the Big Integrated Oil Companies like CVX and XOM, "These are slow-growing companies with a ton of cash that are always trying to replenish oil pumped while maintaining discipline and spending billions on future projects that may not move the needle, because all they do is keep these companies from falling off the treadmill."
Cramer doesn't believe they're worth owning and I disagree. CVX and XOM are excellent investments for those who want mainly income with the potential for very modest capital appreciation.
If you're looking for higher capital growth and appreciation then I'd focus on the prospering independent energy-growth companies like Pioneer Natural Resources (PXD) and EOG Resources (EOG). Both PXD and EOG trade at much richer multiples to earnings and are considered by many as takeover targets for the declining, big integrated energy companies.
As an example, PXD currently has a market cap of $28.4 billion. An energy analyst recently opined that CVX or XOM may be willing to pay upward of $40 billion for PXD and its production. That's amazing, but it is also another sign of how badly the majors need growth.
By the way, if you own these stocks during current market conditions you need a disciplined exit strategy and a "safety net" for each position. That's why I'm a big proponent of stealth trailing stop alerts.
Conclusion: If you need income with modest upside growth, pick companies like CVX, XOM and while you're at it pick up shares of ConocoPhillips (COP) if shares correct to $70, thus offering a dividend yield-to-price of 3.94%.
To boost your chances of experiencing some bigger upside rewards, consider scaling into shares of PXD, EOG, and while you're at it try some shares of another splendid growth energy company, Noble Energy (NBL). These energy super-producers aren't tied down by the big infrastructure costs needed to refine and market the upstream product. It's why the market affords them much higher PE ratios.
One final word of speculative hope for CVX and XOM shareholders. The board and officers of these companies may someday follow the example of COP and unlock value by spinning off the least profitable divisions.
It wouldn't surprise me at the end of one of the upcoming quarters that CVX or XOM announces the spin-offs into more digestible pieces. Many believe the parts are worth more than the whole. Don't count on it, but it may give both behemoths a huge upside boost in stock valuations if they embark on such a shareholder-friendly course.