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Why This Is Not the Right Time to Buy Exxon and Chevron

October 23, 2013 | About:
After the last developments on the lawsuit brought by Ecuadorian citizens against Chevron (CVX), future prospects deserve to be reassessed. To have a point of comparison, industry leader Exxon (XOM) will also be investigated. I intend to look beyond the recent up-and-down of the stock price. It has to be understood that President Correa’s campaign against the oil giant is part of stock price variations, but it is foolish to think the media strategy is solely responsible.

Of Lawsuits, Stock Price, New Regions and Projects

Following the recently sat industry trend, Chevron has concentrated new activities in areas other than the Middle East. The company has nonetheless sustained its wide economic moat, thanks to its integrated operations and strong upstream operations. Nonetheless, the downstream has recently been restructured in order to match performance. With respect to the Middle East, the firm is pushing forward with a chemicals operation.

Mr. Correa has made an important public stunt by taking journalists on a tour to the contaminated region. To coherent, at the time Texaco operated the facilities responsible for the environmental damage. However, when Chevron acquired the Texas based oil company, the issue had not been fully resolved. Stock price has continued to climb amid the legal rumbles with Ecuadorian authorities. But, during 2013 the publicity has weighted heavier than before. In other words, the company has been the closest to having been found responsible for the damage done. Culpability would have meant a settlement of around $19 billion.

Now, Chevron is moving closer to Ecuador by taking a greater interest in the Mexican Gulf. Other regions that have come under the eye of the oil giant are West Africa, northern Australia, and the Gulf of Thailand. In Australia, the company holds the most important projects for the upcoming years –Gorgon and Wheatstone. Another important project is the Kitimat LNG project located in Canada, of which the firm owes a 50% stake. The acquisition goes in line with rumors about an exit from the producing side of the business, to focus all efforts on worldwide discovery of new oil & gas reserves.

Financially, Chevron is strong enough to curve short term performance inconsistencies. Currently trading at 9.6 times its trailing earnings, the stock trades at the industry average. Additionally, stock price has declined during the last three months, and gurus have registered no changes. Even though I feel optimistic about the company, especially after the International Arbitration Tribunal tilted the balance of justice in favor of the oil giant, I will remain on the sidelines until stock price enters a steady path, or a better discount is offered.

Declining Stock Price and New Lawsuit

Exxon is the world´s largest integrated oil & gas by market cap. Size however, has not made the company immune to environmental lawsuits. The lawsuit has been filed by Pennsylvania’s Attorney General, against Exxon’s subsidiary XTO, concerning five counts of unlawful conduct under the Clean Streams Law. The company is accused of spilling 50,000 gallons of wastewater at one of its wells in the Marcellus Shale in 2010. After the charges were made public, stock price enter a steep decline registering the lowest price through 2013.

Besides the legal issues, Exxon has produced lower-than-expected volumes, compounded by weak prices during the last quarter. The detail is relevant because it is the continuation of a trend completes the second full-year with declining production levels. The acquisition of XTO, even though analysts approved the transaction as an improvement of gas operations, brought a new headache to management. Last, current production levels evidence the fact that increasing production in Qatar and West Africa has not offset maturing North American and European reserves.

On the upside, Exxon is a core holding for investors seeking a defensive name with continued dividend growth, and its track record of superior return on capital employed. Amid lower production levels management has announced an increment of 29% on investment programs. Total investment is expected to hit $185 billion in the next five years. The company has also placed an eye on the Mexican Gulf, but operations have spread to unstable regions.

Financially, Exxon is in great shape due to wide margins and strong cash flow. Trading at 10.7 times its trailing earnings, the stock carries a 10% premium. Donald Yacktman, the Yacktamn Fund, and Yacktman Focused Fund have all been active recently increasing their position. Ken Fisher also raised his stake 1,800%. I share their optimism but prefer to remain on the sidelines.

Of Lawsuits and Discounts

Neither company is a bad long-term investment. As a matter of fact I like both firms, but pending legal issues and the absence of discounts tell me this is not a good entry point. Also, Chevron’s management has hinted important structural changes. On Exxon’s side, declining production levels for the last two years pose an important question over the future.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanin Aegea
A fundamental analyst at Lone Tree Analytics

Visit Vanin Aegea's Website


Rating: 3.2/5 (5 votes)

Comments

w.james.0900
W.james.0900 - 10 months ago
Great article. I would say Chevron is best for dividend seekers and ExxonMobil is great for long term investment. ExxonMobil is safer because it has higher reserves and it can operate for 15 more years. Whereas Chevron is concerned it has highest cash dividend coverage of 2.79x as compared to 2.39x of ExxonMobil . These facts are from http://goo.gl/ZSZQo3
jacob.chang11
Jacob.chang11 - 10 months ago
If one is thinking for the long term investment, considering Exxon is a good option_[goo.gl]

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