After the market closed on Thursday night, Warren Buffett's Berkshire Hathaway (NYSE:BRK.B) announced they had acquired 40.1M shares of Exxon Mobil (NYSE:XOM) for a total price of $3.45B. Additionally, Berkshire disclosed it has lightened its exposure to CononoPhillips, (NYSE:COP) selling 44% of their stake in the company. As I type this on Friday, shares in Exxon (XOM) are heading higher and shares in ConocoPhillips are down, both approximately 1% in either direction.
While I don't have quite the record the Oracle of Omaha does, I'd argue that CononoPhillips a better buy than Exxon at these levels. Here's why.
Over the past 4 quarters, COP has an average operating margin of 25.6%, crushing Exxon's average operating margin of 10.1%. If you look at net margins (excluding special items) the gap is still substantial, at 13.9% compared to 7.9% for Exxon.
Here's where Exxon gets the nod over ConocoPhillips, since COP has been aggressively selling and spinning off assets, most notably the spin-off of Conoco's downstream assets into a separate company, called Phillips 66, (NYSE:PSX) in spring of 2012. Phillips has done well as natural gas prices have remained low, reducing the cost of one of their major inputs.
Conoco's 2013 revenues are estimated at $55.7B for 2013 and $56.0B for 2014, according to analyst expectations tabulated over at Yahoo! Finance. These are decreases from 2012's revenue of $62B, but the company has been selling off assets to explain the drop. Earnings are expected to be $5.86 in 2013 and $6.36 in 2014, putting forward P/E ratios at 13.6 and 11.4, respectively.
Again, according to Yahoo!, Exxon's 2013 revenues are estimated at $447.5B for 2013 and $442.0B for 2014. This is also a slight decrease compared to 2012's revenue of $453.1B. Earnings are expected to be $7.45 in 2013 and $7.96 in 2014, putting forward P/E ratios at 12.7 and 11.8, respectively.
Both companies trade at comparable P/E ratios, but Exxon has done a better job of keeping revenues from eroding. Additionally, Exxon still has their downstream division in house, a nice hedge against falling oil prices.
COP has a book value of $29.17 per share, which means it's trading at a price to book ratio of 2.5. The company is sitting on $3.88B in cash (or equivalents) and has an acceptable debt to equity ratio of 0.41.
XOM has a book value of $38.74 per share, which means it's trading at a price to book ratio of 2.4. The company is sitting on $5.31B in cash (or equivalents) and has a good debt to equity ratio of 0.13.
Exxon has been buying back stock aggressively, reducing the share count from 4.559B in 2012's 3rd quarter to 4.369B after their most recent quarter. Conoco has actually issued a few shares over that time period, although nothing that really moved the needle.
While both companies have the ability to issue debt in the future, Exxon's balance sheet is better than ConocoPhillips's.
At the beginning of 2009 Exxon had a quarterly dividend of 40 cents. By the end of this year they will pay 63 cents per quarter, a current yield of 2.7%. They've grown the dividend at a CAGR of 9.5%. You're looking at a quarterly dividend of $1.00 per share if they can maintain their dividend growth. This represents a yield on cost of 4.2%.
At the beginning of 2009 COP's dividend was 47 cents per quarter. By the end of this year they will pay 69 cents per quarter, a current yield of 3.8%. They've grown the dividend at a CAGR of 8%. Assuming the company can maintain that growth, you're looking at a quarterly dividend of $1.00 per share in 2019. This is a yield on cost of 5.5%.
ConocoPhillips has been paying out more aggressive dividends, while Exxon has concentrated more on buying back stock.
I think both companies are solid buys at these levels. COP is more of a play on the price of oil, while XOM's downstream business is decent diversification if the price of oil declines. Just don't expect XOM to do anything but trade off the price of oil, as the following chart shows.
Still, I can't ignore COP's succulent margins. COP should trade at a P/E premium based on that alone. I also like the better current dividend, although Exxon is starting to catch up on that front.
Exxon is a buy at these levels as well, but ConocoPhillips is just a hair better. Sorry Warren.
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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.