Big 3 Oil Plays: Which Is Best To Buy?

Includes: BP, CVX, XOM
by: Vineet Dutta

One of the few things that worked in the latter half of 2011 was the oil trade. One of the ways to take advantage of the run up in oil prices is to buy the large integrated oil companies, but how do you know which one to buy? For the most part these companies move in sync with one another in the short term, but longer dated comparison show a significant divergence. Over the past 5 years Chevron Corporation (NYSE:CVX) has outperformed Exxon Mobil Corporation (NYSE:XOM) by approximately 20% and BP p.l.c (NYSE:BP) by 70%.


There is one primary reason why I believe CVX will outperform XOM-- that is, XOM's exposure to natural gas. XOM was the first in the space to make a sizeable acquisition. The company spent more than $36 billion in the acquisition of natural gas producer XTO energy. Since then, natural gas prices have plummeted and continue to weigh on XOM. I believe in the long term natural gas prices will rebound and underscore the growing importance of natural gas to what we consider as big oil. Continued discovery of shale plays and lack of political will to use natural gas as a bridge fuel will continue to weigh on natural gas prices in the interim. This is one key factor that will drive CVX outperformance over XOM in the next couple of years.


The primary reason why BP has underperformed by such a large margin to CVX, and even its peers, is because of the Gulf of Mexico oil spill. It has since recovered from its lows of $27 reached back in April 2010 and has started trending upwards. BP is expecting to generate an increase of around 50% in additional operating cash flow in 2014 compared to 2011, at an oil price of $100 a barrel-- approximately half from ending gulf of Mexico trust fund payments and around half from operations. BP plans to use this additional operating cash for increased investment in its project inventory, possible increased distributions to shareholders through dividends and buybacks as appropriate, or repayment of debt. BP was forced to sell assets to help pay for legal obligations as well cleanup efforts caused by the spill, and I feel this liquidation of assets will come back to haunt BP. Oil prices are trading at a much higher price now as opposed to when BP was initially selling assets, in which case they will have to pay a premium for the assets they would currently want to acquire.

CVX might not be the best in the space, but if the previous 5 years is any indication of the next 5 years then CVX might be the best choice for your portfolio compared to some of its competitors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.