Fourth Quarter Earnings Preview: Exxon, Shell And Chevron

Includes: CVX, RDS.A, RDS.B, XOM
by: Oil & Energy Daily

Some of the biggest names in the energy industry - Exxon Mobil (XOM), Chevron (CVX) and Royal Dutch Shell (RDS.A, RDS.B) - are set to report earnings this week. And early indications are that they'll be posting some strong numbers.

So we're going to do a thumbnail analysis of each company and the investment prospects - starting with Exxon.

Exxon Aims to Bounce Back

Exxon has long been the undisputed king of energy super-majors, though it struggled a bit in the third quarter.

The company's third-quarter profit fell 7% to $9.57 billion, or $2.09 per share. Revenue was down 8%, at $115.7 billion. Exxon's refining and retail businesses performed well, but the exploration and production end of its business weighed the company down.

The average analyst estimate this time around is for earnings of $2.02 per share on revenue of $117 billion.

Of course, it wouldn't come as much of a shock if Exxon were to top estimates.

The company's holdings include 25 billion barrels of oil equivalent, with assets in Canada, the Gulf of Mexico, Africa and now the Arctic. Indeed, the company last year signed a deal with Russia's Rosneft to exploit the estimated 85 billion barrels of hydrocarbons buried in the extreme north.

Exxon also has a strong balance sheet with $13 billion in cash and just $9 billion in long-term debt.

That's particularly impressive, considering the company paid $41 billion to acquire XTO Energy in 2010. That takeover has yet to pay off, as historically low prices have suppressed Exxon's natural gas production.

Still, with the United States inching closer to exporting liquefied natural gas ((NYSEMKT:LNG)), the natural gas price rebound is already gaining momentum. Prices should rise this year, taking Exxon shares along for the ride.

All of these considerations make Exxon stock a "Buy," regardless of what happens in the short term.

Is Chevron a Bargain?

Chevron also has the look of a strong performer. In an interim update on January 10, the company said it expects fourth-quarter earnings to be "notably higher" than they were in the third.

Like Exxon, Chevron saw its third-quarter profit fall, mainly due to a drop in oil and gas production. Chevron's output fell 4% to a little more than 2.5 million barrels per day, as Hurricane Isaac shut down wells in the Gulf of Mexico and field repairs were carried out in Europe.

Additionally, difficult year-over-year comparisons exacerbated the earnings decline, with net income tumbling 33%.

Things will be different this time around, as the company increased its oil and gas production in the final three months of 2012. The average analyst estimate is for net income of $3.01 per share, up from $2.84 a year ago and $2.83 in the third quarter.

And that may be low-balling the company, which could see earnings as high as $3.35 a share.

Indeed, Chevron is very well positioned heading into 2013. The company has generated about $28 billion in free cash flow over the past 12 months and its EBITDA margin in that period is 22%.

The stock is relatively cheap, as well. CVX is currently trading at about nine times earnings on a forward P/E basis, compared to 11 times for Exxon. It has a better dividend yield, too, as it's currently yielding a little more than 3%. That compares with a 2.5% yield for XOM.

Shell Runs Aground

While Exxon and Chevron find themselves in a better position, the odd man out this week looks to be Royal Dutch Shell.

Shell hit a rough patch recently when one of its drillships ran aground off the coast of Alaska, jeopardizing the company's plan to drill in the Arctic.

Shell has sunk more than $4 billion into its Arctic adventure, building two drilling ships, 20 supporting ships and undergoing a lengthy process to obtain U.S. licenses to drill despite opposition from environmental groups. So its recent setbacks won't be taken lightly.

Furthermore, Chief Executive Officer Peter Voser has warned that lower North American crude and gas prices could curb earnings.

Shell reported a 15% drop in third-quarter profit, which came in at $6.1 billion, and its fourth quarter could prove equally dismal.

It's not all bad for the company, which has seen increased production from its Athabasca oil sands project in Canada and its liquefied natural gas ((LNG)) complex in Qatar.

But overall, Shell has put itself behind the eight ball, trailing competitors like Exxon and Chevron.

Of the three, those are the only two stocks worth considering at this point.

And "the chase" continues.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.