The Big 5 in Oil Should Be on Your Watchlist

Includes: BP, COP, CVX, HAL, RDS.A, SLB, XOM
by: Bio Insights

BP (NYSE:BP), Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP), Exxon (NYSE:XOM), and Shell (NYSE:RDS.A) enjoyed a massive victory on Tuesday evening as Senate Bill 940 was turned down. This was, of course, the bill that was attempting to remove tax loopholes for these companies in angry response to high gasoline prices. As always the American taxpayer is going to have to take the burden, which sums up to about $21 billion over the next decade.

In this environment where the U.S. debt ceiling has been reached and there are frantic pushes in Congress to reduce government spending, big oil still won its tax break. In addition, with their oligopolistic pricing power they have kept gasoline prices at their April levels without as much as a slap on the wrist from the government. This brought to my attention how comfortable big oil must feel right now about their profits. They're not too expensive by regular fundamental measures and they're dishing out healthy dividends with growth in an environment like this. Is petro energy a buy?

In the article, we'll be looking at the industry as a whole with a quick look at each of the big five oil firms that benefit from the $21 billion subsidy extended on Tuesday's vote -- Bp, Chevron, ConocoPhillips, Exxon, and Shell.

Judging by correlation in the markets, the biggest challenge the big oil stocks in the near future is the (still) relatively high price for crude oil. The supply side of the equation has been skewed towards a surplus in the commodity, while demand has been relatively stagnant from both the lacking employment and the high prices -- even in Asia. Looking at statistics released by the Energy Information Administration, net imports have dropped by a huge 12.7% in the last year. Gasoline production managed to drop 2% as well, and in addition to a consistently falling utilization rate of crude oil inputs oversupply is becoming apparent as the demand is simply not there both now and in the near future according to EIA estimates. If firms are so desperate to scale back production, it paints a rather unenthusiastic view of the oil industry as a whole. With firms willing to supply less oil at a lower price due to the sluggish demand, it will be more difficult to maintain the kind of profit growth that energy bulls are expecting.

Geopolitical events which have caused a temporary bullish slant on crude futures are unpredictable, but have historically "died down" with time. Assuming commodities have become roughly stagnant thus far in 2011 (judging by the commodity index GSG), oil remains 10% above where it started this year. While the civil war is still affecting Libya, the United States alone produces over five times the petroleum as the war-struck nation. Looking at the numbers, this supposed "supply shortage" caused by geopolitical events is plain folly. In addition, Saudi Arabia has more than compensated for the Libyan deficit which should have kept a lid on crude prices.

With the situation surrounding oil supply and demand, it seems unlikely that the energy companies will be enjoying another big rally based on crude spot prices without another huge event. In fact, an oil drop might significantly depress the prices of these companies in the near future if the correlation holds as tightly as it has this year.

The big five should still be on your watchlist regardless, and if you feel that the light is green for big oil equities, be sure to buy the right one(s)!

Historic stock quotes for the companies as well as the numbers for the XLE ETF are taken from google finance.

BP plc

YTD: - 3.6%

Against XLE (the SPDR Energy ETF): - 12%

BP is still losing money from the oil spill, but bulls argue that it's trading on a very cheap fundamental basis relative to its projected earnings. The number is about 7.4 or so for its forward P/E according to the S&P report, but analysts have been known to be a bit optimistic on companies in distress. Still, dividend seekers shouldn't mind the current yield of 3.9%. It's hard to say it's the best buy however, as the company is focusing on simultaneously pulling itself out of 27.5 billion dollars of debt, slowly repairing its reputation, and competing with other oil giants in R&D and exploration.

More details can be found in the Q1 report.


YTD: 12.2%

Against XLE: + 3.8%

Chevron has been my favorite of the big five for a variety of reasons. Most importantly, it's a cheaper version of Exxon with a better dividend and equally strong prospects. The P/E is a solid 10 as of now, and the forward multiple is about 7.8 from the S&P report on CVX.

The firm is in the process of restructuring oil refining which has been expensive to run relative to profits due to the current weak demand. The firm is also expanding natural gas operations in the Pacific Asian region (like with the Wheatstone project in Australia) and should benefit drastically from a turnaround in energy demand from China especially. I feel that this is the way to go looking forward, as overstating the world's demand for energy (resulting in oversupplying it) is a disaster waiting to happen. Chevron is the best in breed, and pays a dividend yielding 3% as a reward for your faith.

This information was obtained through commentary from executives in March as well as the Q1 Earnings Report commentary from the firm itself.


YTD: 5.9%

Against XLE: - 3.5%

People who like P/E will note that COP is a very cheap stock on trailing earnings, with the ratio at about 9. This is cheaper, but note that the reason is due to the projected earnings which are expected to decline in the near future due to a less healthy balance sheet. Dividend lovers will probably favor this stock over CVX or XOM due to the high current yield of 3.6%, but whether or not the yield will stay the highest is yet to be determined. Commentary in the latest quarterly release by Jeff Sheets the CFO suggests that oil exploration will be particularly emphasized in North America.

A transcript of the prepared remarks by the firm can be found here.


YTD: 10.9%

Against XLE: + 2.5%

The oil behemoth trades at a modest 11.6 P/E multiple and a forward multiple of 9.6 according to the S&P report. Considering the size and stability of XOM, it's a damn good deal if the analysts know what they're saying. Exxon is broadly positioned due to the sheer size of its market cap as well as its emphasis on expanding beyond oil production. . At least for the time being, the dividend is the lowest on the list, but the company is quite unstoppable. The latest quarterly report has shown that there has been steady growth in all sectors of the company, particularly earnings where Exxon really does deliver. Q1 2011 was 70% higher than Q1 2010 for instance.

The highlights of the guidance commentary and data are here.

Royal Dutch Shell

YTD: 4.2%

Against XLE: -4.2%

Shell is relatively inexpensive at a multiple of 9.2. Its presence is widespread, but similar to COP the growth prospects of the firm aren't perceived to be as lucrative as the likes of Exxon. Still, dividend investors should be interested in the 4.8% yield, which puts Shell at the top of this list in that regard. Such high dividends rarely come with relatively low risks! It's earnings growth has been less impressive than the likes of Exxon at about 40% (comparing Q1 2011 and Q1 2010). This brings up the question whether dividends will be increased at the same rate as the faster growing energy companies on the list.

Information was taken from the latest quarterly report.

In the end while bearish news for oil prices may affect these stocks, they cannot fall all that far if traders keep the earnings in mind. In order to protect against the high correlation with crude prices, traders who want to buy now should consider buying fractions of a position at a time hence protecting against any additional free-falls in crude prices. In addition, one who wishes to diversify may want to consider supplementary oil equities like Halliburton (NYSE:HAL) and Schlumberger (NYSE:SLB) who are expected to have higher profit growth. There are also the smaller less consolidated companies which focus on gasoline production and distribution.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in XOM, CVX, HAL over the next 72 hours.