5 Oil Companies Sitting Scared In Hugo Chavez's Venezuela

Includes: BP, COP, CVX, PBR, STO, XOM
by: Investment Underground

By Larry Gellar

In a televised speech, Hugo Chavez announced that Venezuela would not recognize any ruling from the World Bank regarding the nationalization of Exxon Mobil’s (NYSE:XOM) Cerro Negro oil project. What does that mean for Exxon Mobil and four other oil companies that have operations in Venezuela?

Exxon Mobil Corporation is seeking $12 billion in compensation for assets that were taken from its Cerro Negro project. In fact, the company has already won a $908 million settlement related to the Cerro Negro project, although that was just for the company’s lost earnings. More specifically, the case was decided by the International Chamber of Commerce, and the counterparty to the settlement was PDVSA, Venezuela’s state oil company. Back in the U.S., Exxon Mobil has had some news in regards to a joint project it currently has with Statoil (NYSE:STO). Essentially, Exxon Mobil and Statoil will have to pony up some more money to the U.S. government in order to pursue what could be a very lucrative project in the Gulf of Mexico. For instance, the agreement raises payments from royalties, amount of land in use, and the yearly rate. Current expectations are that the first phase of the project will allow for production of over 175 million barrels of oil, and the companies would like to start production on the six wells by June 2016. As for Exxon Mobil’s statistics, price to earnings, price/earnings to growth, gross margin, and operating margin are all about in line with the industry average.

Chevron Corporation (NYSE:CVX) recently signed a big deal to work in Venezuela’s Orinoco Belt. Other significant onshore operations for Chevron are in the Boscan Field in western Venezuela, and the LL-652 Field in Lake Maracaibo. The company also has notable offshore operations in the Plataforma Deltana region and in the Gulf of Venezuela. The real news for Chevron has actually come from Ecuador, however. Chevron could be liable for as much as $18 billion in damages due to the dumping of toxic drilling wastes by its Texaco subsidiary. Chevron is trying to get protection for any assets that could be seized, but that request was temporarily denied. CVX stock of course reacted negatively to this news, although the stock has been on a strong upward trend since November. The stock was trading below $95 per share back then, but now the stock price is nearly $110. Regardless, price to earnings, price/earnings to growth, and price-to-sales ratios for the stock remain fairly low. Chevron also boasts great margins – those numbers are 32.09% gross and 16.17% operating. As for cash flows, $5.344 billion flowed into Chevron during 2010, and $169 million flowed in during the first three quarters of 2011. That reduction of inflows has been mostly due to the company’s efforts to pay down debt.

ConocoPhillips (NYSE:COP) actually has a bigger case at the World Bank’s International Centre for Settlement than Exxon Mobil. The company is looking for over $20 billion in compensation, although most industry analysts highly doubt ConocoPhillips will get anywhere near that. It’ll be a while before the ConocoPhillips case is decided, which means events in Alaska, are actually more pressing. ConocoPhillips would like to work with Exxon Mobil and BP on a pipeline to transport liquefied natural gas, but TransCanada is actually the only company that has the rights to create such a pipeline. The oil companies hope that this can improve the export process to customers in the Asian-Pacific region, and the plan revolves around moving oil to the middle of Alaska first. Clearly, investors weren’t too excited about this Alaskan plan because the stock has actually been on the decline for a few days now. That’s helped to keep the stock’s value metrics down to put it in the buy and hold category, and the stock’s price-to-sales ratio of 0.43 is pretty low compared with the competition. Margins for ConocoPhillips are also pretty low though – those numbers are 22.77% gross and 9.79% operating. Other news for ConocoPhillips has related to the closing of a refinery in Pennsylvania, which is a move that many union workers are not thrilled with.

BP plc doesn’t have a tremendous amount of assets in Venezuela, although it does still own half of TNK-BP. In turn, Russia-based TNK-BP has a 16.7% stake in PetroMonagas, which is a joint project with PDVSA, the national Venezuelan oil company. PetroMonagas says oil output will increase by approximately 9 percent in the first quarter of 2012, and 54 new wells are being built. More pressing news for BP has revolved around its resolution of claims related to the Deepwater Horizon spill. A new court ruling says that BP’s $20 billion fund must also include in its payouts a 6 percent fee for plaintiffs’ lawyers. That hasn’t affected the stock price very much though, and BP has moved up significantly since October prices of below $36. In fact, the stock is now trading for almost $45 per share. Regardless, price-to-earnings and price-to-sales ratios for BP are still very low compared with the competition. That in part has to do with the company’s low margins, which are 14.98% gross and 7.80% operating. As for cash flows, $10.217 billion flowed into BP during 2010, although $559 million flowed out in the first threequarters of 2011. In fact, the latest outflows have been mostly caused by investing activities.

Petroleo Brasileiro (NYSE:PBR) has four joint ventures in Venezuelan onshore fields as well as some offshore operations. This company of course focuses more on Brazil though, and a joint venture between it, Repsol, and BG Group has been declared commercially viable. That means the companies can include it as part of their proven reserves, and current estimates are that the field has 2.1 billion barrels of oil and natural gas equivalent. Furthermore, formal production can start now. News like that will help Petroleo Brasileiro in the long run, but the stock has been moving sideways for some time now. That’s been mostly caused by lack of movement in the price for crude oil as well as uncertainty about the debt situation in Europe. The price-to-earnings ratio for Petroleo Brasileiro is only 7.99, and the company actually has pretty good margins. Those numbers are 33.61% gross and 20.29% operating. As for cash flows, $1.464 billion flowed in to Petroleo Brasileiro during 2010, and $9 million flowed out during the first three quarters of 2011. That reversal has been mostly due to the fact that the company issued a lot of new stock in 2010. Consider reading this article for more Latin American stock picks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.