It's a natural tendency for people to remember recent events better. The effect of this is clear-- investors start to primarily focus on the latest media headlines; sovereign debt, financial scandals, corruption claims, deficits, and political rhetoric. We forget that over the longer term the cash equity market has still been one of the best ways to grow your money as an investor. Investor psychology remains a fundamental issue for the majority of retail investors, and the emotional investing that's associated with this always lurks around the corner.
One of the most important things in investing is to keep an open mind. The world is constantly changing and it's safe to say we're all wrong part of the time. If the evidence changes, you must be prepared to change your view. Sometimes it's indeed best to sell a position and move on. After all, the stock doesn't know you own it, only you do.
But what if your approach and investment thesis is still valid in a down market? Why not stay invested and use new capital, profits and dividends to (re-)invest at attractive levels. After all, a public-opinion poll-- which the market basically is-- is no substitute for well-reasoned thought.
When investing you should always try to abide by certain rules: 1) buy low, sell high, 2) continuously assess valuation, company / sector fundamentals, and management team / company strategy, 3) form an investment thesis beforehand and stick to it, 4) don't let emotion lead your investing (as we are all wrong part of the time).
With that said, let's have a look at 6 leading oil and gas companies, from the United States and Western Europe. In a follow-up article we will take a look at 6 energy majors from other parts of the globe. After extensive review of the underlying businesses and strategies of these supermajors in recent articles on October 25, November 8, and November 28, 2011 respectively, it seems appropriate to take a different approach on this occasion and review these companies through the use of several graphs, clearly showing how the current slump in certain stock prices is providing opportunities to accumulate rock-solid dividend paying large caps at historically low levels in terms of valuation, thereby providing historically high levels of dividend return. Sometimes pictures simply speak louder than words.
Exxon Mobil Corporation (XOM): Exxon is an integrated oil and gas company that explores for, produces, and refines oil around the world. In 2011, it produced 2.4 million barrels of oil and 12.1 billion cubic feet of natural gas a day. At year-end 2011, reserves stood at 17.7 billion BOE. The company is the world's largest refiner and one of the world's largest manufacturers of commodity and specialty chemicals. The company sets itself apart among the other majors as a superior capital allocator and operator. Through efficiency, technology, development, and operational improvements, it consistently delivers higher returns on capital relative to peers.
Exxon has a market cap of $382.5 billion. Current valuation shows a P/E of 9.9, which is above the industry average of 7.9, a P/B of 2.4, and a P/CF of 6.8. The company offers a current dividend yield of approximately 2.4%, which is below the industry average 3.2%. Value and dividend investors will like Exxon's Return-on-Equity [ROE] of average 25% over the last 2.5 years, alongside a Debt-to-Equity ratio of merely 9.5%.
Chevron Corp (CVX) : Chevron is an integrated energy company with exploration, production, and refining operations worldwide. With production of 2.67 million of BOE a day (69% oil), Chevron is the second-largest oil company in the United States. Refineries are located in the United States, South Africa, and Asia for total refining capacity of almost 2 million barrels of oil a day. Proven reserves at year-end 2011 stood at 11.2 billion BOE (58% liquids).
Chevron has a market cap of $199.6 billion. Current valuation shows a P/E of 7.3, which is below the industry average, a P/B of 1.6, and a P/CF of 5.0. CVX offers a current yield of approximately 3.3%, around the industry average. ROE currently stands at 23% and the company's Debt-to-Equity ratio of 7.3% is even lower than that of Exxon.
ConocoPhillips (COP) : ConocoPhillips is a U.S.-based independent E&P. In 2011, it produced 867,000 barrels per day of oil and natural gas liquids, and 4.5 billion cubic feet a day of natural gas, primarily from the United States, Canada, Norway, and the United Kingdom. Proven reserves at year-end 2011 stood at 8.4 billion barrels of oil equivalent, 41% of which are natural gas. In May, it took the final step by spinning off the downstream assets into a separate company, Phillips 66 (PSX).
Post-split, COP now has a market cap of $64.1 billion. Current valuation shows a P/E of 5.6, below industry average, a P/B of 1.0, and a P/CF of 3.2. What's attractive about COP at the moment is that the overall dividend after the PSX spin-off has remained at $0.66 quarterly. This means Conoco now offers a current yield of approximately 5.2%. ROE tends to hover around 18% and Conoco's Debt-to-Equity ratio is 42.3%
Royal Dutch Shell NV/PLC (RDS.A) (RDS.B) : Shell is an integrated energy company with exploration, production, and refining operations worldwide. With production of more than 3 million BOE a day, Shell is one of the largest energy companies in the world. Refineries are in the United States, Europe, and Asia and capacity is expected to be near 3 million BOE barrels of oil a day in 2012. 2011 year-end proven reserves (including equity affiliates attributable to Shell shareholders) stood at 14 billion. Beyond fixed-price service contracts, such as Iraq, Shell is increasingly turning toward the production of natural gas.
Shell has a market cap of $195.3 billion. Current valuation shows a P/E of 6.3, below the industry average, a P/B of 1.1, and a P/CF of 4.7. The company offers a current yield of approximately 4.6% based on $0.86 quarterly for the ADRs. Shell's ROE stands at 18.5%, a PEG of 1.0, and Debt-to-Equity is rapid declining from 31.2% 1.5 years ago to 19.4% now.
BP PLC (BP) : London-based BP is an integrated oil and gas firm with operations across six continents. BP's upstream operations (including TNK-BP) produced 3.4 million barrels of oil equivalent per day during 2011. Downstream operations include 14 refineries with 2.4 million barrels per day of capacity, petrochemical plants, and retail marketing operations. BP has suffered some serious setbacks in recent years related to the Macondo spill, the TNK-BP partnership, and the collapse of a strategic agreement with Rosneft (RNFTF.PK).
Despite these major issues, BP's underlying business remains sound, and the company still generates significant cash flow. Market cap stands at $118.9 billion. Current valuation shows a P/E of 4.9, a P/B of 1.0, and a P/CF of 5.2. Today's ADR price of $37.60 gives a dividend yield of 5.1%, around the industry average. ROE is hovering around 22-24% and BP's Debt-to-Equity ratio is slowly declining, now 38.9%. Less than expected Macondo costs and additional asset sales-- specifically its large North American refineries-- could prove to be catalysts, but time will tell.
Total SA (TOT) : Total is an integrated energy with oil and gas production of more than 2.3 million of barrels of oil equivalent a day (approximately 52% is oil). The company is one of the 10 largest chemicals companies in the world and operates a global refinery footprint with 1.9 million barrels of oil per day capacity. Proven reserves hover near the 10 billion BOE mark, 54% oil. Total is increasingly moving towards natural gas, specifically LNG, now being the world's second-largest player behind Shell. The company is also pushing frontier oil exploration in areas such as deep offshore, Russia, and oil sands.
Total has a market cap of $99.6 billion. Current valuation shows a P/E of 6.5, a P/B of 1.1, and a P/CF of merely 4.1. In October 2010 the company switched from an interim and final dividend to a quarterly dividend policy. Total paid €0.57 [Euro] dividend during the last couple of quarters, which translates to a dividend yield of approximately 6.5%. ROE currently stands at 18-19% and the company's Debt-to-Equity ratio stands at 46.4%.
From time to time I like to remind myself that there is, and always will be, a stark difference between investing and speculation. It's not the first time, and will certainly not be the last, that markets are shaken up by a financial crisis, or confronted with a potentially prolonged period of stagnation in the stock market. During the seventeen-year period between 1965 and 1981, the Dow Jones industrial average went exactly nowhere. The DJIA stood at 874 at the beginning of '65 and 875 by the end of '81.
One could easily assume that the same applied to GDP and company growth. However, during those seventeen years, the size of the U.S. economy grew fivefold and Fortune 500 companies grew sales by even more than that. What you need to remember is that investing is basically laying money out now to get more money back at a later time. There are really only two questions: One is how much you're going to get back, and the other is when. A stock market can go nowhere, but that doesn't mean there isn't opportunity to be found in individual equities.
In the short run, the market is often called a voting machine. In the long run, it should function more like a weighing machine. Votes may count in the short term, but a weighing machine looks at a company's intrinsic value and long-term earnings potential. Especially in the current, volatile market climate, it's important to correctly price stocks, which is something entirely different than trying to predict their course of action during the next month or next year. Valuing is not the same as predicting.
"If a business does well, the stock eventually follows. Price is what you pay. Value is what you get" (Warren Buffett).