Please don’t hold it against me, but I was watching “Mad Money” the other night and heard Jim Cramer explain his preference for ConocoPhilips (COP, Financial) over ExxonMobil (XOM, Financial) as a favorite stock in the oil and gas sector. Given a recent investment in XOM, I decided to compare these two companies head to head.
1. Exxon Mobil
Company Introduction
Exxon Mobil Corporation is the second-largest publicly traded international oil and gas company in the world. The company is engaged in managing the entire production cycle of crude oil, from exploration and production of crude oil and natural gases, to the manufacturing, transport and sale of crude oil, natural gases and petroleum products. The company has manufacturing and marketing bases spread across six continents.
Major competitors to the company include Chevron Corporation (CVX), British Petroleum, ConocoPhilips and Royal Dutch Shell (RDS.A). The company is headed by Rex W. Tillerson, who serves as chairman and chief executive officer.
Growth and Performance
Exxon Mobil has been a consistent performer, barring a blip in share value in the 2008-09 market downturn. Recently, in April 2011, the company declared a dividend increase of 6.80% at 47 cents per share. As such, since the past decade, the oil giant has delivered an impressive 9.6% annualized total return to its long-term investors. The company’s earnings per share (EPS) has risen steadily at 12.3% per year since 2001. It reported earnings of $6.22 per share in 2010 and consensus analysts estimates for earnings in 2011 and 2012 are $8.28 per share and $8.85 per share, respectively.
Long-term Strategy and Vision
Exxon Mobil enjoys an enviable reserve replacement ratio, which indicates that the company has adequate oil reserves. The massive scale and size of Exxon’s operations ensure that the company receives huge advantages in terms of economies of scale, and is able to maximize production activity across its projects. Many national oil companies (NOCs) lack the resources and/or know-how to effectively explore for and develop reserves in their countries and therefore rely on partnerships with private industry. Exxon has become the preferred partner in these ventures. With a view to the long term, the company has made aggressive investments in developing high-efficiency projects worldwide; most notably in Qatar, Norway and the US.
Recently, Exxon has also been bullish on natural shale gas and forecasts increased demand for energy through natural gas resources. Keeping this view, the company is presently betting heavily on natural gas, and has accumulated significant natural gas assets, including XTO Energy, which will help increase its natural gas production capabilities by over 25%.
Aside from the technical expertise, the XTO energy acquisition will also enable Exxon Mobil to effectively develop new shale field reserves worldwide. It is likely that such investments will complement ExxonMobil’s core competencies and generate returns in excess of the cost of capital, as exploration and production of natural gas can be significantly lower, when compared with oil production.
2. ConocoPhillips
Company Introduction
ConocoPhillips was formed in August 2002 following the merger of oil companies Conoco and Phillips Petroleum. Today, the company is among the top three energy companies in the United States. The company is an integrated oil and gas producer, and like its competitors, is engaged in the entire production life cycle of fuel, beginning from extraction and refining, to transport and marketing of energy products.
In March 2006, the company bought Burlington Resources, helping it gain access to Burlington’s extensive natural gas production network, and position itself as a key player in the natural gas segment.
In addition, ConocoPhillips also enjoys a significant presence in chemicals and plastics production, thanks to its 50% stake in Chevron Phillips Chemical Company LLC (CP Chem), a leader in the production of olefins, polyolefins, aromatics and styrenics. The company is headed by James J. Mulva who serves as chairman and chief executive officer.
Growth and Performance
In 2010, ConocoPhillips earned $11.4 billion, on total revenues of $189 billion. The company shares are currently trading at $72.27 per share, and earnings per share of $7.94 were reported for 2010. Consensus estimates for 2011 stand at $8.18. While the company’s valuation may have been impacted in recent years by some of the baggage that came with its recent acquisitions and the market downturn in 2008-09, the company’s current market value is estimated at $110 billion, on a fully diluted basis.
Long-Term Strategy and Vision
ConocoPhillips’ acquisition of Burlington Resources in 2006 has helped leverage its position as a key player in the natural gas segment. The company is presently engaged in building diversified interests in the energy sector, and has recently commenced production of renewable diesel. Further, it has initiated the first Alpine satellite oil field, and is partnering with Tyson Foods Inc. (TSN), in producing next-generation renewable diesel fuel.
ConocoPhillips is a relatively young organization as compared with most of its competitors. However, the legacies of the organizations that came together to form this energy giant, and the diversified approach that ConocoPhillips has taken within the energy sector, are bound to create significant advantages in the long term.
Which company is the better investment for value investors?
A cursory examination of valuation metrics indicates that both companies are somewhat attractively valued, with GuruFocus members voting that COP is trading at a larger discount to fair value (~17% discount for COP compared to ~7% discount for XOM).
However, when we look at 10-year return on invested capital (ROC), we see that ExxonMobil is the hands down heavyweight champion of capital allocation and clearly has a durable competitive advantage. For this value investor, patiently waiting for XOM to come down to a 20-30% margin of safety is the best allocation of my capital.
Disclosures: Long XOM (acquisition price $62.5-$62.64).
About the Author: Dan Hennessy is a value investor with a PhD in biomedical sciences and a healthy hero worship of Benjamin Graham and Warren Buffet. Visit us at www.marginofsafetyportfolio.com
1. Exxon Mobil
Company Introduction
Exxon Mobil Corporation is the second-largest publicly traded international oil and gas company in the world. The company is engaged in managing the entire production cycle of crude oil, from exploration and production of crude oil and natural gases, to the manufacturing, transport and sale of crude oil, natural gases and petroleum products. The company has manufacturing and marketing bases spread across six continents.
Major competitors to the company include Chevron Corporation (CVX), British Petroleum, ConocoPhilips and Royal Dutch Shell (RDS.A). The company is headed by Rex W. Tillerson, who serves as chairman and chief executive officer.
Growth and Performance
Exxon Mobil has been a consistent performer, barring a blip in share value in the 2008-09 market downturn. Recently, in April 2011, the company declared a dividend increase of 6.80% at 47 cents per share. As such, since the past decade, the oil giant has delivered an impressive 9.6% annualized total return to its long-term investors. The company’s earnings per share (EPS) has risen steadily at 12.3% per year since 2001. It reported earnings of $6.22 per share in 2010 and consensus analysts estimates for earnings in 2011 and 2012 are $8.28 per share and $8.85 per share, respectively.
Long-term Strategy and Vision
Exxon Mobil enjoys an enviable reserve replacement ratio, which indicates that the company has adequate oil reserves. The massive scale and size of Exxon’s operations ensure that the company receives huge advantages in terms of economies of scale, and is able to maximize production activity across its projects. Many national oil companies (NOCs) lack the resources and/or know-how to effectively explore for and develop reserves in their countries and therefore rely on partnerships with private industry. Exxon has become the preferred partner in these ventures. With a view to the long term, the company has made aggressive investments in developing high-efficiency projects worldwide; most notably in Qatar, Norway and the US.
Recently, Exxon has also been bullish on natural shale gas and forecasts increased demand for energy through natural gas resources. Keeping this view, the company is presently betting heavily on natural gas, and has accumulated significant natural gas assets, including XTO Energy, which will help increase its natural gas production capabilities by over 25%.
Aside from the technical expertise, the XTO energy acquisition will also enable Exxon Mobil to effectively develop new shale field reserves worldwide. It is likely that such investments will complement ExxonMobil’s core competencies and generate returns in excess of the cost of capital, as exploration and production of natural gas can be significantly lower, when compared with oil production.
2. ConocoPhillips
Company Introduction
ConocoPhillips was formed in August 2002 following the merger of oil companies Conoco and Phillips Petroleum. Today, the company is among the top three energy companies in the United States. The company is an integrated oil and gas producer, and like its competitors, is engaged in the entire production life cycle of fuel, beginning from extraction and refining, to transport and marketing of energy products.
In March 2006, the company bought Burlington Resources, helping it gain access to Burlington’s extensive natural gas production network, and position itself as a key player in the natural gas segment.
In addition, ConocoPhillips also enjoys a significant presence in chemicals and plastics production, thanks to its 50% stake in Chevron Phillips Chemical Company LLC (CP Chem), a leader in the production of olefins, polyolefins, aromatics and styrenics. The company is headed by James J. Mulva who serves as chairman and chief executive officer.
Growth and Performance
In 2010, ConocoPhillips earned $11.4 billion, on total revenues of $189 billion. The company shares are currently trading at $72.27 per share, and earnings per share of $7.94 were reported for 2010. Consensus estimates for 2011 stand at $8.18. While the company’s valuation may have been impacted in recent years by some of the baggage that came with its recent acquisitions and the market downturn in 2008-09, the company’s current market value is estimated at $110 billion, on a fully diluted basis.
Long-Term Strategy and Vision
ConocoPhillips’ acquisition of Burlington Resources in 2006 has helped leverage its position as a key player in the natural gas segment. The company is presently engaged in building diversified interests in the energy sector, and has recently commenced production of renewable diesel. Further, it has initiated the first Alpine satellite oil field, and is partnering with Tyson Foods Inc. (TSN), in producing next-generation renewable diesel fuel.
ConocoPhillips is a relatively young organization as compared with most of its competitors. However, the legacies of the organizations that came together to form this energy giant, and the diversified approach that ConocoPhillips has taken within the energy sector, are bound to create significant advantages in the long term.
Which company is the better investment for value investors?
A cursory examination of valuation metrics indicates that both companies are somewhat attractively valued, with GuruFocus members voting that COP is trading at a larger discount to fair value (~17% discount for COP compared to ~7% discount for XOM).
However, when we look at 10-year return on invested capital (ROC), we see that ExxonMobil is the hands down heavyweight champion of capital allocation and clearly has a durable competitive advantage. For this value investor, patiently waiting for XOM to come down to a 20-30% margin of safety is the best allocation of my capital.
Disclosures: Long XOM (acquisition price $62.5-$62.64).
About the Author: Dan Hennessy is a value investor with a PhD in biomedical sciences and a healthy hero worship of Benjamin Graham and Warren Buffet. Visit us at www.marginofsafetyportfolio.com
