Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Oil prices are setting new records day by day. With the U.S. economy showing signs of improvement and Middle East tensions on the rise, it is time to have a look at the major U.S. integrated oil companies. In this article, I will compare Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP) where I will look in detail at each company's prospects for current income, growth and valuation.

Current income

Traditionally, many investors (especially retirees) have favored oil stocks for the fat dividend they use to pay. While oil companies still tend to pay above average yields, many of them have favored massive repurchase programs over the last couple of years. To clear the picture, I'll take them into account as well.

Exxon Mobil pays the lowest dividend yield with 2.1%. But over the past four years, Exxon has spent $96 billion to repurchase stock, which represents 21% of all outstanding shares at today's valuation.

ConocoPhillips pays the highest dividend yield with 3.5% but only spent $23 billion or 9.5% of outstanding stock at today's valuation. Chevron spent "just" $9 billion on repurchases or 3.7% of outstanding stock on top of its 3.0% dividend yield.

As such, total yields to shareholders range from 4.0% for Chevron to 8.0% for ConocoPhillips. These percentages come closer to what investors traditionally obtained from oil stock investments. Today they don't get these higher yields directly as many companies have initiated major repurchase programs.

Company Market Capitalization Share price Dividend Dividend Yield 2011 Repurchase Repurchase yield Total yield
Exxon Mobil $459 billion $87.34 $1.88 2.1% $21B (estimate) 4.6% 6.7%
ConocoPhillips $244 billion $75.95 $2.64 3.5% $11B 4.5% 8.0%
Chevron $244 billion $109.08 $3.64 3.0% $2.5B 1.0% 4.0%

Growth

Compared to the peak year of 2008 when oil peaked at $147 per barrel, growth has been modest or negative for most of the oil majors. Of interest is the continued growth of Exxon Mobil, which could report over $500 billion in annual revenue for the first time in 2012. To the contrary, Chevron has seen its revenue falling by almost 8% over the four-year period.

In terms of profitability, Exxon has actually seen a 9% decline in profits. Per share, the profit decline was largely offset by its repurchase plans. Profit for ConocoPhillips are not representative as the large loss in 2008 was mostly a one-off item. Chevron, on the other hand, managed to increase net earnings by some 12% despite the drop in revenues. As a result of share repurchases, earnings per share grew by 22%.

Company Revenue 2011 Revenue 2008 Revenue Growth% Net profit 2011 Net profit 2008 Net profit Growth% Earnings per share 2011 Earnings per share 2008 Earnings per share growth
Exxon Mobil $486B $460B +5.6% $41.0B $45.2B -9.3% $8.42 $8.66 -2.8%
ConocoPhillips $245B $241B +1.6% $12.4B ($16.4B) na $8.97 ($10.73) na
Chevron $244B $265B -7.9% $26.9B $23.9B +12.6% $3.09 $2.53 +22.1%

Future growth

Obviously past growth is no indication of future growth. To make a reasonable assessment of future growth, we have to compare the investment budgets the majors have committed to. Exxon has invested the most, almost $98 billion over the last four years. All three majors invest much more compared to the total amount of depreciation on past investments.

Investment budgets over the last 4 years have been between 150-180% of depreciation over the period. Despite cost inflation driving up investment budgets across the industry, more projects will come online in the coming years and high oil prices will definitely drive growth for the immediate future.

Company 2008-2011 Capex 2008-2011 Depreciation Capex/Depreciation Average capex/net income 2011
Exxon Mobil $98B $55B 178% 60%
ConocoPhillips $53B $35B 153% 106%
Chevron $75B $43B 174% 70%

Valuation

While dividend yields and growth prospects are obviously crucial in evaluation a business, in the end it all comes down to the valuation. All the majors are valued at 0.9-1.0 times their annual revenues.

Price-earnings ratios diverge much more. ConocoPhillips trades at 19.7 times earnings as it has much lower margins to compared to its rivals. Clearly the market expects a pick up in margins. Furthermore, it pays the highest current yield, thereby catering to dividend investors better than its rivals.

Of interest is the valuation of Chevron which trades at just 10.1 times price-earnings ratio and has no net debt, in comparison to its other two rivals, which have relatively modest amounts of debt.

Company Market Capitalization 2011 Revenue Revenue multiple Net profit 2011 Price-earnings ratio Net Debt Earnings per share 2011 Earnings per share 2008 Earnings per share growth
Exxon Mobil $459B $460B 1.00x $41.0B 11.2x $4B $8.42 $8.66 -2.8%
ConocoPhillips $244B $245B 1.00x $12.4B 19.7x $16B $8.97 ($10.73) na
Chevron $244B $265B 0.92x $26.9B 10.1x ($6B) $3.09 $2.53 +22.1%

Investment thesis

An investor who bought any of the oil majors a decade ago would have seen reasonable returns. Exxon returned 115%, Chevron returned 140% and ConocoPhillips, a whopping 183%. In comparison, the S&P 500 only returned 25% over the 10-year period.

Returns are driven by higher oil prices during the last decade and the massive share repurchase programs these companies have initiated over time. Actual returns are even higher as the graph does not include dividends investors received over time.

Click to enlarge:

Now, we've discussed the past. Of interest for investors today is: Which of these three will outperform in the next decade?

  • Return of cash: Chevron yields a "mere" 4.0%, while Exxon Mobil offers 6.7% and ConocoPhillips, 8.0%

  • Past growth: while Exxon was the only major to show revenue growth, it saw profits per share fall 3%. ConocoPhillip's results are not directly comparable, while Chevron showed earnings per share growth of 22%

  • Future growth: All majors invest between 150-180% of their average four-year depreciation charges. All of them are expected to show growth in years to come, provided that oil prices will not decline substantially

  • Valuation: Revenue multiples are essentially the same across the group. Price-earnings ratio differ with a 19.7x valuation for ConocoPhillips, 11.2x for Exxon Mobil and 10.1x for Chevron

Despite having the lowest current yield to investors, I prefer Chevron on a relative basis to its competitors as it shows the highest past earnings growth, a competitive investment budget towards the future and has the lowest current price earnings ratio. Additionally it does not hold any net debt.

Exxon Mobil would be a good alternative investment, especially if you take into account the shareholder friendly financial policy.

ConocoPhillips would be my least desired choice. Higher valuation is driven by the market's opinion of the major being able to close the margin gap with its competitors, which not obvious to me yet.

Source: A Valuation Comparison Of 3 Major U.S. Integrated Oil Companies