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

When it comes to some of the oil plays in my portfolio I have always been of the mindset to buy American, simply because those are the names that I knew and understood the most. I have been a long time holder of Conoco Phillips (NYSE:COP) mainly because of its valuation and above average dividend. I also used to jump in and out of Exxon Mobile (NYSE:XOM), Occidental Petroleum Corp. (NYSE:OXY) and Chevron (NYSE:CVX), but I never really stuck around too long. After this past week's split of Conoco Phillips into two separate companies, one being Conoco Phillips and the other Phillips 66 (NYSE:PSX) I have started to reevaluate my current oil position(s).

I like Exxon, Occidental and Chevron, but honestly I would like a bigger dividend and a little better valuation, so I decided to turn my attention to some of the European oil companies. I looked at BP (NYSE:BP), but I still don't like some of the continued uncertainly that looms from the Gulf of Mexico oil spill, regardless of the fact that the new CEO is doing a great job and has generated some solid numbers. I was left really with two major choices, Total S.A. (NYSE:TOT) and Royal Dutch Shell (NYSE:RDS.A). Both of these companies have excellent stories, valuations and dividend payouts. I was a bit torn, so I thought that I might do a straight up comparison of the two company's financials, valuations and future prospects.

Total operates in three main segments that help create the overall business model. Its upstream department specializes in exploration and development. This division is also primarily responsible for the production of all oil, gas, LNG and electricity. Total also has some limited involvement in the renewable energy arena. The company is based in France and has a market cap of $106.8 billion. They generated $166.5 billion in sales during 2011. During its most recent Q1 earnings announcement Total generated a profit of $4.01 billion for the quarter; unfortunately this was 7% below the prior year, even though revenues grew by 11%. The drop was attributed to a drop in overall European demand for petrochemicals. The company also mentioned that they have had several natural gas leaks during the quarter and continue to have leaks, which could end up affecting overall profit for 2012.

Shell is your typical oil and gas company. Its primary business is in the extraction of crude oil and natural gas. Shell also works to be greener by converting natural gas liquids to cleaner burning fuels. Part of Shell's oil exploration also involves the exploration and development of oil sands into crude oil. Shell too has a limited portfolio of renewable energy, primarily in wind energy. The company is based in the Netherlands and has a market cap of $224.6 billion. The company generated $470.1 billion in sales during 2011. During its most recent Q1 earnings announcement Shell posted a profit of $7.3 billion which topped estimates and was 16% above the year prior. Shell attributed most of this gain from above average oil prices in the quarter, average $110/barrel. Total revenue for the quarter also increased by 9% compared to the year prior. Outlook for the remainder of the year was very bullish with the CEO stating that, "energy demand fundamentals are robust."

After looking at these two companies based on Q1 results for 2012 it is clear who the stronger candidate is. It is Royal Dutch Shell. Even so, I don't like to base my entire investment decisions on just one quarter, so let's take a deeper look into some of the financials of each firm. Below is a table that will compare the two oil giants' core fundamentals and ratios.

RDS.A

TOT

2011 Net Income (Millions)

$30,198.00

$12,276.00

Q1 2012 Net Income (Millions)

$8,719.00

$3,660.00

P/E

6.99

6.50

Current EPS

9.89

7.15

Dividend Yield

4.97%

6.42%

Price/Book

1.25

1.15

Profit Margin

6.43%

6.98%

Return on Equity

18.35%

18.01%

Based on the numbers in the above chart you can see that there are several areas where TOT and RDS.A are equal, but there is one area in particular to me that really stands out and sets the two oil giants apart. That is in the area of net income and EPS. RDS.A had net income in 2011 that was 2.5 times that of TOT. A similar situation happened in this past quarter's Q1 numbers. Now, I understand that RDS.A is bigger than TOT, so this net income comparison is not 100% fair. But after looking at the current EPS RDS.A still demonstrates much stronger performance and shareholder value. This is not to say that TOT is a bad company, both companies are great and well run, but from a straight up numbers standpoint if I had to pick, I would choose RDS.A.

After posting their outstanding Q1 numbers two weeks ago as well as raising its target for assets sales in 2012 to $4 billion from original estimate of $2 billion to $3 billion the stock (as it should) shot up past the $70/share and began approaching $72/share. Since then the market has seen some contraction in the oil sector as well as what I believe to be profit taking occurring in RDS.A. This has pushed the stock back down below the $70/share level. The stock currently is trading for around $68.50 - $69 per share. I believe that RDS.A has some additional downside, but will find support at the $67 - $67.50 level. With current valuations as they stand (see above) along with the recent $.02/share dividend increase the $67 - $67.50 level provides for what I would consider to be an attractive entry point. At an average purchase price of $67.25/share your new P/E would be 6.79 with a dividend yield of 5.11%.

When looking for a large oil giant to add to your portfolio I think it is quite clear that RDS.A is an excellent choice and will prove to be a great long term asset that would benefit anyone's portfolio.

Source: 'Shelling' Out Cash For An Oil Giant