Source: Getty Image
An integrated oil company is an oil and gas company involved in the entire oil process cycle, from exploration to distribution. Most investors classify these public companies under the "big oil" group. I will scrutinize the five most prominent ones, which are:
- BP Plc (BP),
- Chevron Corp. (CVX),
- Royal Dutch Shell (RDS.A)(RDS.B),
- TOTAL S.A. (TOT),
- And Exxon Mobil (XOM).
We are entering the last month of 2018 now, and all oil supermajors in the S&P 500 index have reported their third-quarter 2018 numbers. The earnings figure has been exceptionally good with the Energy sector seeing year-over-year robust earnings growth and higher revenues. According to Factset on October 12, 2018:
The Energy sector is expected to report the highest (year-over-year) earnings growth of all eleven sectors at 93.6%. Higher oil prices are helping to drive the unusually high growth rate for the sector, as the average price of oil in Q3 2018 ($69.43) was 44% higher than the average price of oil in Q3 2017 ($48.20).
However, significant oil price weakness which began early October has been excruciatingly painful for the whole oil industry which entered a severe bearish cycle aggravated by increased volatility. The result is that it created uncertainty, and it is one thing that the market doesn't like is precisely uncertainty. Then, it is legitimate to ask ourselves the question below.
Do the oil supermajors continue to make sense for conventional investors?
It is the same question that consistently comes back to torment us all, especially when oil prices are weakening and turn extremely volatile with no real robust future outlook.
The answer is invariably the same, and it is, yes, of course. Investing in the oil and gas business is paramount for the long-term stability of your portfolio. In the oil industry, the oil supermajors represent the "best in the show" and the most active in this category.
The supermajors are safe investments relative to most and will continue to pay their dividends for many years to come.
You drive by their drilling rigs, pump your gas at their gas stations, and consistently hear them tout their environmental awareness and alternative energy ambitions on television. They operate upstream (exploration and production), downstream (refining and distribution), and everywhere in between.
Income Sheet Table Comparison
|Five Oil Supermajors||BP||CVX||RDS-A||XOM||TOT|
|Total Revenues + other income in $ Billion||80.80||43.99||101.55||76.61||48.40|
|Net Income available to common in $ Billion||3.35||4.05||5.84||6.24||3.96|
|EBITDA $ Billion||10.12||11.26||15.84||13.94||10.34|
|Profit margin % (0 if loss)||4.1%||9.2%||5.7%||8.15%||8.2%|
|EPS diluted in $/share||1.00||2.11||1.40||1.46||1.47|
|Cash from operations in $ Billion||6.09||9.57||12.09||11.11||5.74|
|Capital Expenditure in $ Billion||3.68||3.58||5.80||5.20||3.35|
|Free Cash Flow in $ Million||2.42||5.99||6.29||5.90||2.38|
|Total Cash in $ billion||26.29||9.75||19.11||5.67||28.81|
|Total Debt in $ Billion||64.14||35.98||78.38||40.04||56.27|
|Dividend per share in $||0.615||1.12||0.94||0.82||0.620|
|Country withholding Rate on Dividend in %||0.0%||0.0%||15.0%||0.0%||12.8%|
|Shares outstanding (diluted) in Billion||3.35||1.917||4.18||4.27||2.674|
|Oil Equivalent Production in K Boep/d||2,460||2956||3596||3,786||2,804|
|Global liquid price ($/b)||46.14||61.99||68.38||64.06||55.40|
|Global Natural gas price ($/Mbtu)||3.86||1.80||4.92||2.75||4.96|
Source: Companies filing and Morningstar
1 - Revenues and other income
1 - BP Plc. announced its third-quarter earnings results on October 30, 2018. BP Plc had total revenues of $80.803 billion for the quarter, missing analysts' revenue estimate slightly. Earnings after taxation, or underlying net profit, jumped to $3.349 billion in the third quarter from $1.769 billion a year earlier.
2 - Chevron's third-quarter revenues and other income were $43.99 billion, up 21.5% compared to a year ago and up 4.1% sequentially. Chevron posted third-quarter earnings of $4.047 billion or $2.11 per diluted share. It is over $2 billion or roughly $1 per share higher than the same period a year ago.
3 - Oil giant Royal Dutch Shell reported revenues and other income for the third-quarter 2018 of $101.55 billion, up 30.7% year over year and up 2.3% sequentially establishing a new revenue record.
4 - TOTAL S.A. reported third-quarter 2018 diluted earnings of $1.47 per share. Total revenues came in at $48.40 billion, up 30.5% from $37.082 billion generated in the year-ago quarter.
5 - XOM revenues and other income came at $76.61 billion, up 25.4% compared to the third quarter last year and up 4.2% sequentially.
2 - Free Cash Flow (excluding divestitures)
1 - BP expects the pace of divestments to slow in 2018. It realized $3.4 billion from selling assets in 2017 and that's anticipated to drop to about $3 billion in 2018. Free cash flow for BP is positive on a yearly basis and represents $6.78 billion (excluding divestitures). The company's free cash flow for the third quarter was $2.42 million. A further sign of strength is that the company announced on July 27, 2018, that it intends to buy BHP Billiton's (NYSE:BHP) US shale oil and gas assets for $10.5 billion, first such deal in decades.
2 - CVX free cash flow is positive on a yearly basis and represents $10.42 billion (excluding divestitures). The company's free cash flow for the third quarter was a whopping $5.99 billion, up 65% sequentially.
3 - Shell's free cash flow has increased significantly this quarter compared to the last two precedent quarters. Shell is making $16.57 billion in free cash flow on a yearly basis and $6.29 billion this quarter (excluding divestitures).
4 - TOTAL's free cash flow is $5.48 billion ("TTM"). Free cash flow for 3Q'18 was $2.38 billion, and we can consider an average TTM for 2018 of around $8+ billion (1Q'18 negative free cash flow can be regarded as a one-time event).
5 - Free cash flow for Exxon Mobil is positive on a yearly basis and represents $16.83 billion (not including divestitures). The third quarter was $5.90 billion (according to Morningstar). The company indicates an FCF of $7.2 billion which includes divestments.
3 - Upstream: Oil Production
1 - BP production for the quarter was 2,460K Boe/d (not including Rosneft production of 1,151 K Boep/d).
2 - CVX had excellent results in the upstream segment in the third quarter with an output of 2,956K Boep/d, up 8.8% from a year ago and up 4.6% sequentially. The U.S. upstream reached a record 831K Boep/d or 28.11% of the total output. Another record production led by the Permian with a production for the quarter of 338K Boep/d.
3 - Shell's upstream production was 3,596K Boep/d this quarter, down 1.7% compared to a year ago and up 4.5% sequentially. It was a weak production number mainly as a result of divestments. One highlight this quarter is that the company gave the green light to invest in LNG Canada on October 2, 2018.
4 - TOT's hydrocarbon production during the third quarter averaged 2,804K Boep/d, up from 2,581K Boep/d the same quarter last year. Production increased by 8.6% from a year ago due to the acquisition of Maersk Oil and the ramp-up of new projects, such as Yamal LNG, Moho Nord, and Fort Hills. On October 17, 2018, TOTAL S.A. announced that it joined forces with Indian private Adani Group to expand in natural gas and fuel retail activities in India.
5 - Exxon Mobil produced 3,786K Boep/d this third quarter, down 2.4% year over year and up 3.8% sequentially. Liquids represented 2,286K Bop/d or 60.4% of the total production. Exxon is ramping up its drilling initiatives in the Permian Basin. The company plans to increase its oil-equivalent production in the Permian to 600K barrels equivalent a day, within the next five years, spending $50 billion in CapEx in the process. 3Q'18 average production in the Permian was 170K Boep/d.
4 - Net Debt, Total Cash, and LT Debt
1 - BP's net debt is now is $39.2 billion with a net debt-to-EBITDA ("TTM") ratio of ~2.05x.
2 - CVX's net debt is now $26.23 billion, down from $30.69 billion in 3Q'17. Net debt-to-EBITDA ("TTM") is 0.71x in 3Q'18, which is a definite encouraging indicator. The debt ratio is now 19%. The total cash including the restricted cash is now $10.741 billion.
3 - Shell's net debt represents a notable reduction spread over the last eight quarters ($59.27 billion). This substantial decrease was possible due to the completion of a divestiture program with around $26 billion of divestments achieved since the beginning of 2016, including revenues from the MLP spin-off called Shell Midstream Partners (SHLX). Net debt-to-EBITDA ("TTM") is now 1.01x.
4 - TOTAL cash as of September 30, 2018, was approximately $28.81 billion compared with $31.16 billion the same quarter a year ago. Total net debt is now $27.46 billion with a net debt to EBITDA ("TTM") ratio of 0.78x, which is excellent. TOTAL S.A. has also continued to fortify its balance sheet, ending the third quarter with a net debt-to-capital ratio of 16.5%, slightly lower than a year ago at 16.6%.
5 - Exxon Mobil's net debt is now $34.37 billion. Net debt-to-EBITDA is now 0.78x, which is good.
5 - Quarterly Dividend - Country Withholding tax rate - Dividend Yield
The dividend yield is not including the country withholding tax indicated above in red. For a US investor, the dividend will be reduced by up to 15% before receiving the dividend, but for BP ADR there is no withholding tax and only a fee will be paid. For Shell, it is a bit more complicated, and I recommend you to read my recent article about Shell 3Q'18.
We have established that investing in oil supermajors continues to make sense long-term for conventional investors, despite an unavoidable uncertainty and severe volatility attached to the oil business. The strategy is to invest in this sector by choosing at least one or two supermajors that seem adapted to your investment goal. The number of oil stocks in your portfolio depends on your cash availability.
The oil segment should represent about 25% of your entire investment, in my opinion. It includes oil and gas operators and oil services (e.g., onshore drillers, offshore drillers, tool services, etc.).
Then, which supermajor presents the best outlook and the best balance sheet?
These five supermajors are considered very similar and move in concert. They show the same underlying strength with only slight differences and all offer a generous and safe dividend between 4% to 6%, which is justified by abundant free cash flow.
It comes to a primary personal choice.
After analyzing the data above, Royal Dutch Shell is leading the group and should be the primary supermajor in your portfolio.
The second one is more difficult to pick, but for an American investor, it would make sense to choose one of the two US supermajors - Exxon Mobil or Chevron - depending on which oil segment you want to privilege in your growth strategy.
Exxon Mobil presents some high-grade future potential in the offshore sector with the Liza project in Guyana, while Chevron Corp. has a strong domestic presence in the US Shale (notably the Permian Basin).
For international investors, TOTAL S.A. has been outperforming the sector and offers an excellent dividend with now a reduced withholding tax rate of 12.8%, and BP is now a good choice again after resolving the Macondo litigation behind which has cost over $65 billion for the company.
My choice is a little different, and I own Shell, BP, and TOTAL with a small position in Exxon Mobil.
However, I firmly believe that to minimize the risk while maximizing gain; a savvy investor should trade his/her supermajor stocks using about 30% of his/her position. Trading means using the volatility in the short term.
It is not a difficult task and doesn't require a tremendous amount of time. Technical analysis and the Relative Strength Index or RSI(14) are good indicators that could help you to regularly take profit off the table and add on any perceived weakness.
Generally, A reading above 70 is considered bullish, while a reading below 30 is an indication of bearishness. However, it is not as simple as that and trading blindly the RSI is not a profitable idea because it is evident that the market will not reward the obvious.
You will have to look at the RSI as a gauge to determine the primary direction of the trend, its strength, and opt for a strategy to sell or buy when the moment is ripe. It takes time to master it, but it is worth when it comes to solid stocks like the supermajors.
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Disclosure: I am/we are long RDS.B, TOT, BP, XOM. 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.