By Eli Inkrot, Guest Editor
With gas prices spiking around $4 recently, consumers haven’t shied away from voicing their displeasure. But to whom should they sound off to and to what avail will it be? After all, oil is fundamentally based in the supply/demand game and, like it or not, supply is dwindling.
In the short run, U.S. demand appears to be unhesitantly inelastic. More so than other developed nations, as the American way appears to that of the gas guzzler with its "drive everywhere" attitude. Alternatives exist, and to be fair progress has been made: People are buying smaller vehicles and opting for higher fuel efficiency. But then again, I wouldn’t hold my breath for meaningful public transportation overhauls.
Let’s add in the global picture. Demand is rising, but has remained relatively stagnant in the U.S. The emergence of the now wealthier middle class in developing countries is the true driver of growing demand. On the supply side, refineries are not always at capacity and oil location can cause tension. Because of these factors, oil has risen significantly above the level of inflation. In 1960, a gallon of gasoline cost around 25 cents. Adjusted for inflation, today that would be around $1.65 -- which brings us back to the original question: Who should consumers be speaking to? It’s certainly not the pumps, which comprise only about 10% of the total gas price compared to the 15% take of taxes. The real culprit is crude oil, about two thirds of the total price of gas.
Eventually the dependence on oil has to be subdued, but that’s not today and it’s definitely not tomorrow. Long term alternatives are necessary, but they are not yet economically feasible on a wide scale. Ideally companies are working on this, moving from their profitable endeavors today to their necessary options of the future. Let’s see if these firms have the stamina to remain powerhouse profiteers.
If you want to talk big oil, you have to start with Exxon Mobil (NYSE:XOM) and its industry crushing $407 Billion market cap. This Irving-based oil and gas mega-big was recently ranked as the second-largest company by revenue in the Fortune 500 and has a stronghold as Texas' number one, nearly doubling that of far away second ConocoPhillips (NYSE:COP). Wal-Mart (NYSE:WMT) reigns supreme on the Fortune 500, but refining giants XOM and COP along with Chevron (NYSE:CVX) flex their muscles to fill in the next three spots.
Recently XOM has been showing interest in North American oil sands, which could work to reduce Middle East dependence. Additionally Exxon Mobil’s “A View to 2030” is especially compelling, in that it demonstrates that the company understands future demand and the corresponding wants and needs of consumers.
Looking at XOM from the stock prospective, 14 brokers like an expected one-year target upside of about 12%. Income investors also have something to cheer about, as XOM has not only paid but also increased its dividend for 29 consecutive years. The 2.3% current yield might leave a little to be desired, but the 30% payout ratio and near 9% average five-year dividend growth rate suggest sustainability and an increasing yield on cost. Additionally the Price to Earnings ratio around 12 appears promising, as it has dipped below its recent average. If you’re thinking oil, why not consider the biggest player?
Coming in at number three on the Fortune 500 is Chevron. This San Ramon-based oil company is the largest in California with a market cap of about $207 Billion. During the last year, CVX has acquired close to five million acres of shale gas assets in the U.S., Canada, Poland and Romania. Continuing this trend, CVX was recently selected to explore shale gas in northeast Bulgaria. If estimates are correct, Chevron would begin extracting deposits in about seven to 10 years with a potential upside of a rich Bulgarian fuel that could last the Balkan country 300 years.
Like XOM, Chevron has a strong history of increasing its dividend payouts, having increased its payment for 24 straight years. The current yield around 3% leaves income seekers a bit happier, while the 33% payout ratio and 10% average five-year dividend growth rate look all the merrier. Comparatively, the P/E ratio around 10 looks cheap, but it seems to be in line historically; still, 17 brokers like a collective upside of about 15% in the coming year.
Big oil’s strong showing continues with Houston-based ConocoPhillips coming in at number 4 on the Fortune 500. While the $102 Billion market cap lags XOM and CVX by a great deal, it’s certainly nothing to sneeze at. COP has an interesting section entitled “ConocoPhillips Energy Answers” on its website, which discusses important consumer concerns such as gas prices, energy diversity, innovation, efficiency and environmental responsibility.
The 3.6% current yield should make income investors happy, while the 11 straight years of increasing payouts coupled with a 35% payout ratio yell sustainability. Add in the near 13% average five-year dividend growth rate and you’re starting to see the value picture. Analysts like it as well, as 17 brokers have a median one-year target upside of about 15%.
Oil has been riddled with controversy from dependence and price spikes to global warming and fuel efficiency. BP plc (NYSE:BP) added fuel to the fire with its 2010 summer oil spill. Truly an unfortunate disaster; not only did BP’s stock price take a hit, but much more importantly, so did its reputation. Since its $27 low nearly a year ago, this London-based energy company has since rebounded about 69% to over $45 a share; a far cry from its $60 pre-spill mark. The sentiment has calmed but expenses piled up and a healthy dividend was cut in half.
Today, BP has a current yield of about 3.7% as it works to renew faith in operations. In the company's own words: “Re-earning and keeping the trust of society by operating safely and responsibly is the only way we can fulfill our purpose of creating sustainable shareholder value." Before the spill, BP was perhaps the face of alternative and efficient energy within the oil companies. Still, analysts like BP to gain, as nine brokers see a target one-year upside of about 24% despite the recent run-up. Additionally, the P/E ratio appears historically cheap looking forward at 6.6.
With all of the hoopla about Exxon Mobil’s Fortune 500 ranking, it should be noted that Royal Dutch Shell plc (NYSE:RDS.A) actually ousted XOM’s 2010 revenue by about $14 Billion -- although XOM still reigns supreme by making about 50% more in profit than RDS and by nearly doubling its $217 Billion market cap. Known in the U.S. as simply Shell, this Dutch firm operates in over 90 countries with around 93,000 employees worldwide. Interestingly, 48% of Shell’s production is natural gas.
On the sustainability platform, RDS looks to be making an effort with over $2.1 Billion spent on “developing alternative energies and carbon capture” over the last five years. RDS has a current yield of 4.8%, having increased payouts just four times in the last six years. The 42% payout ratio appears sustainable, as dividends and buybacks have steadily increased.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.