Integrated Oil Companies are a vanishing breed. Earlier this year, under the theory that its sum was less than the sum of its parts, the old Marathon Oil Company spun off its refining and marketing arm. Perhaps emboldened, Conoco Phillips (NYSE:COP) is planning the same strategy. How long will America's other big oil companies remain integrated? Who knows? In the meantime, big oil companies will continue to be among the largest and most profitable companies in the world, and be a cornerstone for many growth and income investors. Below I will discuss the four integrated oil giants that have released earnings. Two other western giants, Total SA (TOT) and British Petroleum PLC (BP), have not done so as of yet. I will cover those two in a later article.
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Conoco Philips, Inc. (COP)
Conoco is now America's third-largest integrated oil company, though that will not be the case much longer as Conoco is planning to spin off its refining operations into a separate company in mid 2012. Conoco stock was selling recently at about $70 per share. Its 52-week range is from $81.80 to $58.65, and it is trading at a price-to-earnings ratio of 7.9. It has a market capitalization of $93.5 billion, and it pays a quarterly dividend of $0.66 per share, for a yield of 3.8%.
For 2011, Conoco rode the wave of higher crude oil prices to post fourth-quarter and full year earnings, adjusted for one time events, of $2.7 billion and $12.2 billion, respectively. This compares favorably with 2010 fourth-quarter and full year adjusted earnings of $1.9 billion and $8.8 billion respectively. Per share in 2011 came to $2.02 in the fourth quarter, and $8.76 for the year.
Conoco has been and will continue to be on a mission to cleanse its balance sheet by selling assets, the biggest of which recently have been Conoco's stake in Russian oil giant Lukoil (LUKOY.PK), and Conoco's sales in 2011 of pipeline interests. Conoco has used much of the proceeds from these and other sales to support its share repurchase program. I wonder if a day might come when Conoco wishes it had invested these billions into its core business.
Good things happened to Marathon Oil shareholders when that company underwent a similar split in 2011 to what Conoco plans in 2012. Will Conoco shareholders do as well as Marathon holders did? Who knows? But I like the company, I like that Warren Buffett likes the company, and it is my second favorite integrated petroleum company.
Chevron Corp. (CVX)
Chevron is the country's second largest oil company, with operations in some 180 countries, and engagements in all aspects of oil, gas, and geothermal energy generation and sales. Chevron stock was trading recently at about $105 per share, and its 52-week range is from $110.99 to $86.68. It trades at a price-to-earnings ratio of 13.4, and has a market capitalization of $210 billion. It pays a quarterly dividend of $0.81 per share, for an annual yield of 3.1%.
In its fourth quarter of 2011, Chevron reported earnings of $5.1 billion, off about 2% from the year earlier quarter's $5.3 billion. For all of 2011, it reported earnings of $26.9 billion, up 36% from 2010's $19 billion. The downturn in the fourth quarter was due to troubles in the downstream operations, as it turned to a narrow loss in the quarter, down from over $700 million in the 2010 quarter. The year-ago downstream operation included a one-time $400 million gain from the sale of assets, but margins on refined product narrowed sharply in the 2011 quarter.
My own image of Chevron always turns toward its exposure in Ecuador. The highest court in that country affirmed a trial court's $18 billion judgment against Chevron on behalf of damage caused in the Amazon valley by Texaco, which was subsequently acquired by Chevron. Of course, Chevron has no assets in Ecuador, and collecting on that judgment, or any part of it, will be quite a burden to the plaintiff class. Another court case in Brazil, this time involving a $10.6 billion judgment, might also languish on for years.
Despite these issues, Chevron does a marvelous job of finding fuel, and is developing growing expertise in renewable fuels. It boasts industry leading margins. Over the long run, I expect Chevron to lead the integrated petroleum industry, and it is my top choice for long term investors in the sector.
Exxon Mobil Corp. (XOM)
Exxon is America's largest company by revenue. Its stock was trading recently at about $85 per share, near the high end of its 52-week range of from $88.23 to $67.03. It is trading at a price-to-earnings ratio of 10.1, and has a market capitalization of a whopping $402 billion. It pays a quarterly dividend of $0.47 per share, for a yield of 2.3%.
Exxon had a rather disappointing fourth quarter to cap off a very strong year. For all of 2011, its net and per share earnings were up 35% from their year earlier periods, to $41.06 billion, or $8.42 per share. In the fourth quarter, earnings rose by 2% to $9.4 billion, and per share rose by 6%, to $1.97.
In recent years, an increasing focus of Exxon's revenue has come from natural gas. This move was hastened by Exxon's 2009, $41 billion purchase of XTO Energy. Natural gas prices are in the dumps, and a recovery of those prices is not foreseeable. Exxon spends over $35 billion a year on capital projects, in addition to its share buybacks and decent dividend. There are some who believe, and I agree, that this is not a sustainable course.
I do not have the faith in Exxon that I do in Chevron. Not that Exxon is about to lose money any time soon. And while Exxon has its litigation issues, they are nowhere as severe as Chevron's. But Exxon's dividend yield is substantially less than Chevron, and I believe Chevron has a better long-term future.
Royal Dutch Shell PLC (NYSE:RDS.B)
Anglo - Dutch controlled Shell sells "A" and "B" class shares. The fundamental difference is the Class "A" is governed by Dutch law, and dividends are subject to Dutch withholding tax. The Class "B" shares are governed by British law, and those dividends are not subject to withholding. I therefore focus on the Class "B" shares. Those shares were selling recently at about $73 per share. Its 52-week range is from $78.81 to $58.37, and it has a price-to-earnings ratio of 7.3. It has a market capitalization of $229 billion, and pays an annual dividend of $3.36, for a yield of 4.6%.
Like the other major integrated companies who have reported, Shell had an excellent 2011, yet refining margins and the collapse of natural gas prices weighed on its 4th quarter. For that 4th quarter of 2011, Shell recorded earnings of $6.5 billion, down 4% from $6.79 from the year-ago quarter. But taking out the myriad of one time items, adjusted profit actually increased on a year-to-year basis, by 18% to $4.85 billion. The overall net earnings came to $1.04 per share, compared with the year-ago $1.10 per share. For all of 2011 Shell posted earnings of $31.2 billion, a nearly 50% increase from the 2010 total of $20.5 billion. The current year works out nearly precisely to $10 per class "B" share.
Shell has plans to raise its dividend in 2012 for the first time in three years, and its CEO has grandiose plans for the next few years. But on balance, there is nothing here compelling enough to want to transfer investment dollars from Chevron toward Shell. Shell is good company, but not the best company in this sector.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.