Big Oil And The Rise Of The Little Guys

 |  Includes: BP, COP, CVX, MRO, MUR, VLO, XOM
by: Insider Monkey

Big oil has been lackluster so far this year, getting yawns from investors in spite of strong earnings. Look at BP Plc (NYSE:BP). The oil company annihilated analyst estimates when it reported its fourth quarter performance on February 7, reporting revenues of $96.34 billion, which is over $10 billion more than analyst estimates of $86.23 billion and more than $12 billion higher than the same quarter last year. BP also surprised on its EPS, reporting earnings per share of $2.41 on analyst estimates of $1.59 a share. So, what did that translate to in terms of its stock price? Practically nothing. BP opened trading on February 7 at $46.23, down from the previous day's close of $46.87. The highest the stock reached on the 7th was $46.70. It ultimately closed at $46.60 - hardly the performance one would expect from a company that killed analyst estimates the way BP did, but this is the market today.

Exxon Mobil (NYSE:XOM) didn't fare much better. When it reported its quarterly performance on January 31, it beat analyst estimates on its revenue, reporting $121.6 billion to estimates of $119.70 billion, and its EPS, coming in at $1.97 per share on estimates of $1.96 a share. The increase was modest but it was the first time that XOM outperformed analyst estimates since the Q1 2011, it should be worth something - but the reality is that XOM's share price increased by only around 3% from January 31 to the end of trading on February 7. And, the story was roughly the same for ConocoPhillips (NYSE:COP). It reported earnings of $2.02 per share on January 25, solidly outpacing EPS estimates of $1.78 a share. It sounds spectacular, but it translated to less than a 3% gain from January 25 to February 7. Chevron (NYSE:CVX) missed analyst estimates, reporting on January 27 fourth quarter revenues of $58.03 billion compared to estimates of $70.96 billion and earnings per share of $2.58 compared to expectations of $2.85 a share, but it really didn't matter with regards to its share price - in spite of its poor quarterly performance, CVX share prices are up almost 3% since the report.

The uphill battle facing big oil share prices may be less a result of earnings and more to issues facing the wider industry. On the one hand, production is coming up short of expectations and the capital investment required to seek new sources of oil is climbing higher. On the other side, the price of oil has risen, leaving less room for investor upside. Even the prospect of dividends is not what it used to be. BP is paying a 42 cent dividend (3.6% yield), which is half what it was paying before 2010's Deepwater Horizon oil spill. XOM is paying a 47 cents dividend yield, up from the 23 cents it had been paying when it split its stock in 2001. The climb has been continuous, but it still translates to a yield of just 2.20%. COP pays a 66 cent dividend, which has climbed consistently since 1995, but that translates to a yield of just 3.7%, narrowly beating out BP. CVX is paying an 81 cent dividend, which has increased consistently over the last 30 years - an impressive figure - but relative to its current share price, the yield is just 3.00%.

In other words, without the prospect of a strong upside and low dividends, investors are looking elsewhere. After all, there are plenty of reasons to be bullish about commodities right now. On January 25, federal policy makers said that they would keep their target interest rate for overnight loans between banks near zero for the next three years at least, and they didn't rule out buying more bonds. This latter move is called quantitative easing. When that happens, commodities and raw materials always go up because it is a signal that the Fed is going to continue an easy monetary stance so people look more toward real or physical assets, and the companies that are related to those assets, such as those that refine the asset.

It seems that investors are choosing the same companies in the oil industry. Take Marathon Oil (NYSE:MRO) for example. It reported its Q4 2011 performance on February 1. MRO beat analyst estimates on its revenue, coming in at $3.81 billion versus expectations of $2.91 billion, but it fell short on its EPS for that period. Analysts had predicted MRO would have earnings of 82 cents per share, but it reported just 78 cents a share, down from $1.09 a share the same quarter last year - but were investors swayed? No. From February 1 to February 7, MRO returned 5% - and the difference is not the dividend. MRO has a dividend of just 68 cents (2.10% dividend yield). Merrill Lynch even named MRO as one of the 10 Best Stocks of 2012.

Investors are also bullish on Murphy Oil (NYSE:MUR) too. The stock figures prominently in Doug Hirsch's Seneca Capital portfolio and has returned over 2% since it reported its Q4 2011 performance on January 25, in spite of the fact that it reports a negative EPS of −59 cents a share when analysts were expecting $1.40 a share. Valero Energy (NYSE:VLO), which is a favorite of David Tepper's Appaloosa Management Lp, also fared well. It reported its Q4 2011 performance on January 31 of just 8 cents a share on expectations that it would lose 17 cents a share for the period. From January 31 to February 7, VLO returned over 5%. We think this trend will continue over the next six months and small oil player will outperform their larger peers.

Disclosure: I am long COP.