In the energy industry, money undoubtedly talks. All the majors or the industry leaders get the benefits of easy investment opportunities in any new or existing project because of their access to massive capital. It is obvious that the more you can invest, the more is the expected rate of return. Hence, the stockholders of these companies are entitled to higher returns than the other stockholders. Yet, a typical stock investor might be confused about investing in the majors, as the price of these stocks is usually higher than the rest of the industries’. The following analysis will help you to decide if you should actually invest in the five stocks with the largest market capitals in the energy industry.
Exxon Mobil Corporation (XOM): With a market capital of $377.2 billion, XOM leads the energy industry in the United States. Its revenue, earnings per share and dividend grew at the rate of 22.8%, 58% and 1.88%, respectively, in the last 12 months. This is reflected in its year-to-date price performance of 7.63%. This stock’s price to earnings ratio is 9.5 that is less than the S&P500 average of 17.5 and is quite in line with the average ratio of 4.5 in the industry. Considering their other performances and strong financial condition, this price to earnings ratio seems to be a discount for the investors. Again, its low price to sales and price to book ratio confirms the stability of this stock in this volatile marketplace. All the analysts suggest buying this stock as its beta is still only 0.51. Besides, it has a strong dividend yield of 2.40% as per the 3rd quarter report. Hence, if you are thinking of investing a significant amount of money in a safe stock for a steady return over the long term, you must have XOM in your portfolio.
Chevron Corp (CVX): Within the first three quarters of 2011, CVX has managed to earn revenue of $193.72 billion. This is almost close to its 2010 annual revenue figure of $196.76 billion. Its earnings per share year to date are $10.50, which is even higher than its previous year’s annual earnings per share of $9.5. In spite of higher revenue and earnings per share than in the previous year, this company is acting a bit conservative in terms of sharing its profit with the common stock holder. It did not affect its share price as its dividend yield of 3.1% is still higher than its peers like XOM (2.40%) and is also higher than the S&P average of 2.10%. However, it is lower than the industry average of 4.10%. The oil and gas industry as a whole is dominated by the National oil companies or NOCs. Therefore, private companies are forced to explore in the tough offshore areas, whilst most of the onshore and shallow offshore areas are reserved for the national authorities. This is why CVX is retaining their profit to be able to invest for a better return in the future. Though, the company is now selling at a high price of $106.79 per share, most of the analysts rate this stock as ‘strong buy’ assuming this investment will bring whopping return in the future.
Ecopetrol S.A. (EC): While most of the majors had a positive year to date growth in price performance, EC had experienced a decrease of -4.06%. However, we can consider its 52-week price range of $37-$49 to be somewhat stable, if we consider the instability in the industry due to the oil price volatility throughout the last year. Besides, EC has a stable revenue growth of 46.9%. Although EC is performing better than most of the industry peers, investors sometimes avoid investing in the stock. Since the company is a foreign NOC, you may doubt that it is not going to share its profit properly. However, it has a remarkably large dividend yield of 5.10%, and this rate is quite high compared to its industry peers. The last quarter’s large profit news has pulled up its share price in the market. Most of the analysts are rating this share as a hold. Now the investors should observe this stock closely, invest when the price falls again, and sell when the price rises.
Enterprise Product Partners LP (EPD): In the latest quarter, EPD had earned a promising $0.55 per share unit, which was above expectation of the analysts’ assumption of $0.50 per unit, and about 208% higher than earnings in the same quarter in 2010. Its dividend yield is about 5.10 percent which is quite lucrative compared to its close industry peers (1.30%). EPD had an increase in sales revenue and earnings per common share unit. However, its price to book ratio of 3.37 and price to earnings ratio of 37.80 is pretty high as its industry peers have an average price to book of 1.81 and price to earnings of 14.60. Yet, EPD had managed to get a solid cash flow in the first nine months, and managed to retain about 30% of earnings for future investments. Its current coverage ratio of 1.7 is mainly due to the large distributable cash flow that is about $856 million. All the analysts are assuming further growth in its sales revenue, earnings and dividend distribution in the next few months. Therefore, the average market rating for this share is a ‘strong buy’.
TransCanada Corporation (TRP): With a price to book ratio of only 1.85 and a beta of 0.77, this share seems quite risk free for the investors. Moreover, their dividend yield is 4% which is in line with the industry average and above the S&P 500 average. However, its inventory turnover ratio is only 6.2 times a year, while its industry peers can sell out their inventories over 16 times a year. Moreover, the company has a vast difference in its gross profit margin (71%) to the net profit margin (0.17%). Although the company’s net profit margin is still above the others in the industry, we can expect that with a better sales effort, it probably can manage to make more money. For a short time, the analysts are suggesting for holding this stock. Buying or selling is not recommended until further price movement can be assumed.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.