Oil & Gas Majors: 3 To Consider, 1 To Avoid

Includes: BP, CVX, OXY, RDS.A, XOM
by: Ry Frank

It's common knowledge, big oil posts big profits. Companies in this field also pay sizable dividends to investors willing to ride the volatile roller-coaster of hydrocarbons, off-shore wells, and new field exploration. The US Energy Information Administration predicts that worldwide energy use will be 50% higher in 2030 than it is now. The companies on this list represent those in the private sector with the greatest ability to serve that demand. The bottom line: you need big oil in your portfolio.


Exxon Mobil (XOM) is the world's third largest company, behind Wal-Mart (WMT) and Royal Dutch Shell (RDS.A), which is not included on this list due to its lacking US financial disclosures. Its market capitalization is nearly $396 billion. The stock trades for $84 per share with a trailing price-to-earnings ratio of 9.98 and a forward price-to-earnings of 9.36. Exxon has earnings of $8.42 per share. It pays out 22% of its profits with a dividend of $1.88 per share, which yields 2.3%.

Exxon's 2011 balance sheet showed the company holding $12.66 billion in cash, adding $4.84 billion from its 2010 cash reserves. The company posted revenue of $434 billion. Net income increased to $41.06 billion in 2011 compared to $30.46 billion in 2010.

Next up is Chevron (CVX), with a market cap of $201 billion. It is priced at $101 with a trailing P/E of 7.55 and a forward P/E of 7.52. Chevron earns $13.44 per share. The company pays a $3.24 dividend that yields 3.2%. Its payout ratio is 23%.

Chevron kept a 2011 cash hoard of $20.07 billion, up $1.8 billion from 2010. Revenue totaled $236.29 billion. Net income in 2011 was $26.90 billion, up from $19.02 billion in 2010.

BP (BP), which has a market cap of $135 billion, changes hands at $42 with a ridiculously low trailing P/E of 5.28. The company's profits are projected to fall over the next year, thus its forward P/E is 6.15. The British oil giant earns $8.06 per share. Its $1.92 boasts a slightly outsized yield of 4.6%, a product of its discounted share price due to legal battles over the Deepwater Horizon oil spill in 2010.

BP has $14.36 billion cash on hand, down $4.50 billion from 2010. The company had revenues of $375.92 billion. BP racked up net income of $26.10 billion in 2011, rebounding from a $3.32 billion net loss in 2010.

Rounding out the list is Occidental Petroleum (OXY), whose market cap is $70.77 billion. Its shares trade for $88; Oxy's trailing P/E is 10.49 and its forward P/E is 9.21. The company earns $8.32 per share from its operations, mostly based in the Middle East. It dividend is $2.16 per share and yields 2.4%. The firm has a payout ratio of 22%.

Oxy held a stash of $3.78 billion in 2011, up $1.2 billion from 2010. It had revenue of $23.94 billion. Its net income stood at $6.77 billion in 2011, compared to $4.53 billion in 2010.

Where should investors drill for profit?

Don't pick just one of these stocks and call it good. It's an excellent idea to diversify, especially with big oil stocks, as each company has particular strengths. Exxon's primary strength is its sheer size; it has the highest revenue of any company in the world. Massive revenue is an undeniably powerful resource that grants Exxon a great flexibility in the investments it pursues. Frankly, no matter what investment decisions it makes, everyone walks away richer at the end of the day.

Chevron offers a bigger dividend than Exxon and a better profit margin of 11.38% versus Exxon's 9.47%. The company has access to a wide variety of oil fields across the globe and faces little governmental instability around its production sites. Even Venezuela, a thorn in the side of US politicians, has a warm, stable relationship with the oil giant.

Oxy has a sky high profit margin of 28.28% and rapid revenue growth. 2011's fourth quarter revenues exceeded those in the final quarter of 2010 by almost 20%. Oxy does face political instability and the threat of terrorism, however, as much of its production lies in bastions of peace and love such as Iraq, Yemen, Oman, and Libya.

So what about BP? The company's dividend offers abnormally high yield compared to big oil's other power brokers and the discounted share price offers plenty of potential for upside. However, in my opinion, BP is a bit of a dangerous trade. BP's lawyers recently settled a class action lawsuit with Gulf Coast residents and will pay out another $7.8 billion to people in the area. This is on top of $8 billion it has already paid in claims to residents and $14 billion it has spent in clean-ups to date. However, the agreement does not include federal, state, and local government claims against BP, and the size of its potential liability is unclear.

BP recently filed countersuit against the US government, which the company claims has been hiding documents that may reduce its total liability. While BP must disclose the potential for losses in claims against it, the latest legal turmoil has left the ultimate number in a fog. Oil companies are essentially currency printing presses, but the possibility of more vast and currently unknown costs leaves me skeptical of buying into BP at this point. The stock will take more lumps as rulings come down against it in government claims, even as the company itself rebounds. Avoid BP until the end results of this entire situation are clear and the company has a litigation-free path forward.

Bottom line, you really can't go wrong investing in Exxon, Chevron, or Occidental. The share price of all three is projected to increase in excess of 10% over the next year, with Oxy projected to climb a tantalizing 39%. Get them now, while valuations are low and profit from their tidy dividend payouts on the ride up.

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

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