The oil and gas industry is highly competitive, and this could adversely affect companies’ profitability, as well as their ability to grow and manage their businesses. Let's take a look at two companies in the Oil & Gas sector and see which one is doing better and thus stands as the best investment.
Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacturing of petroleum products. It is the world´s largest publicly traded oil company. ExxonMobil's businesses include oil and natural gas exploration and production (64% of 2012 segment earnings); refining and marketing (28%); chemicals (8%); and other operations, such as electric power generation, coal and minerals.
Investment Program
The company plans to invest about $185 billion over the next five years (up 29% from the last five-year period), or $38 billion per year. A total of 28 major oil and gas projects will begin production between 2013 and 2017. The firm expects to start up 21 major projects in the next three years and anticipates adding over 1 million net oil-equivalent barrels per day by 2016. This includes the Kearl Oil Sands project in Canada, four in West Africa and Kashagan Phase 1 in Kazakhstan and the Papua New Guinea liquefied natural gas project.
Least Explored Offshore-Areas
Exxon and Russia's Rosneft joined in a Strategic Cooperation Agreement. The agreement provides the companies with exploration opportunities in Russia, the U.S. and other countries throughout the world, as well as expertise-sharing activities. The agreement includes US$3.2 billion to be spent funding exploration in the Kara Sea and Black Sea, as well as exploration of seven other licenses in the Russian Arctic. These developments will boost earnings in the near future.
Valuation
In terms of valuation, the stock sells at a trailing P/E of x11.1, trading at a premium compared to the industry average of x10.6. Analysts’ expectations imply a forward P/E of 11.31. To use another metrics, its price-to-book ratio of 2.3x indicates a premium versus the industry average of 1.22x and the price-to-sales ratio of 0.9x is above the industry average of 0.57x. In addition, the strong cash flow makes the company increased its dividend in Apr. 2013 at an annualized $2.52 per share, yielding 2.80% which demonstrates its commitment to return cash to investors.
A Giant in China
PetroChina Co. Ltd. (PTR) is the largest integrated Oil & Gas Company in China and about 87% of its shares are state-owned by China National Petroleum Corp. (CNPC). The company operates in four segments: Exploration & Production, Natural Gas & Pipelines, Refining & Chemicals, and Marketing.
Favorable Trend
The growth experimented in China´s economy has spillover effects, increasing demand for oil, natural gas and chemicals. The company can afford the increased demand generated by an expanded middle class looking for more gasoline for their cars. Crude oil and natural gas reserves are located in different regions across China. The company holds exploration and exploitation licenses for oil and gas for a total area of 417.5 million acres. Exploration licenses cover a total area of 394.9 million acres and the exploitation licenses cover a total area of 22.6 million acres. In its natural gas business, it is projected a potential growth due to the change from coal to natural gas and government´s promotion also. In this segment a great impact could happen because two-thirds of China's electricity is generated by coal-fired power plants and also recent Chinese government decision to raise gas prices the first time in three years.
Heavily Exposed
The Daqing oil region is located in the Songliao basin and covers an area of approximately one million acres and a third of its current crude oil volumes. This source of oil is in decline because is difficult to extract crude oil as time passes. For this reason, the firm has to spent huge amount of dollars to import oil (465.6 million barrels in 2012).
Its P/E multiple on a trailing-12 month basis is 11.9 and the forward P/E multiple is 8.84. The current dividend yield is 3.7%, which is quite good to protect the purchasing power.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity.
It is very important to understand this metric before investing in a high-growth company.
Final Comment
PetroChina depends highly on the Daqing oil region, where costs continue to increase due to difficulties in extracting crude oil. On the other side, Exxon has licenses to explore in the most promising areas, which seems more attractive for long-term investors.
Hedge fund gurus like Ray Dalio, Donald Yacktman and Jeremy Grantham added this stock to their portfolios, and I would advise fundamental investors to consider adding this stock to theirs as well.
Disclosure: Victor Selva holds no position in any stocks mentioned
Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacturing of petroleum products. It is the world´s largest publicly traded oil company. ExxonMobil's businesses include oil and natural gas exploration and production (64% of 2012 segment earnings); refining and marketing (28%); chemicals (8%); and other operations, such as electric power generation, coal and minerals.
Investment Program
The company plans to invest about $185 billion over the next five years (up 29% from the last five-year period), or $38 billion per year. A total of 28 major oil and gas projects will begin production between 2013 and 2017. The firm expects to start up 21 major projects in the next three years and anticipates adding over 1 million net oil-equivalent barrels per day by 2016. This includes the Kearl Oil Sands project in Canada, four in West Africa and Kashagan Phase 1 in Kazakhstan and the Papua New Guinea liquefied natural gas project.
Least Explored Offshore-Areas
Exxon and Russia's Rosneft joined in a Strategic Cooperation Agreement. The agreement provides the companies with exploration opportunities in Russia, the U.S. and other countries throughout the world, as well as expertise-sharing activities. The agreement includes US$3.2 billion to be spent funding exploration in the Kara Sea and Black Sea, as well as exploration of seven other licenses in the Russian Arctic. These developments will boost earnings in the near future.
Valuation
In terms of valuation, the stock sells at a trailing P/E of x11.1, trading at a premium compared to the industry average of x10.6. Analysts’ expectations imply a forward P/E of 11.31. To use another metrics, its price-to-book ratio of 2.3x indicates a premium versus the industry average of 1.22x and the price-to-sales ratio of 0.9x is above the industry average of 0.57x. In addition, the strong cash flow makes the company increased its dividend in Apr. 2013 at an annualized $2.52 per share, yielding 2.80% which demonstrates its commitment to return cash to investors.
A Giant in China
PetroChina Co. Ltd. (PTR) is the largest integrated Oil & Gas Company in China and about 87% of its shares are state-owned by China National Petroleum Corp. (CNPC). The company operates in four segments: Exploration & Production, Natural Gas & Pipelines, Refining & Chemicals, and Marketing.
Favorable Trend
The growth experimented in China´s economy has spillover effects, increasing demand for oil, natural gas and chemicals. The company can afford the increased demand generated by an expanded middle class looking for more gasoline for their cars. Crude oil and natural gas reserves are located in different regions across China. The company holds exploration and exploitation licenses for oil and gas for a total area of 417.5 million acres. Exploration licenses cover a total area of 394.9 million acres and the exploitation licenses cover a total area of 22.6 million acres. In its natural gas business, it is projected a potential growth due to the change from coal to natural gas and government´s promotion also. In this segment a great impact could happen because two-thirds of China's electricity is generated by coal-fired power plants and also recent Chinese government decision to raise gas prices the first time in three years.
Heavily Exposed
The Daqing oil region is located in the Songliao basin and covers an area of approximately one million acres and a third of its current crude oil volumes. This source of oil is in decline because is difficult to extract crude oil as time passes. For this reason, the firm has to spent huge amount of dollars to import oil (465.6 million barrels in 2012).
Its P/E multiple on a trailing-12 month basis is 11.9 and the forward P/E multiple is 8.84. The current dividend yield is 3.7%, which is quite good to protect the purchasing power.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity.
| Company | ROE | Compared to Industry Mean (=10.8) |
| Exxon | 27.1 | Above |
| PetroChina | 10.8 | Equal |
It is very important to understand this metric before investing in a high-growth company.
Final Comment
PetroChina depends highly on the Daqing oil region, where costs continue to increase due to difficulties in extracting crude oil. On the other side, Exxon has licenses to explore in the most promising areas, which seems more attractive for long-term investors.
Hedge fund gurus like Ray Dalio, Donald Yacktman and Jeremy Grantham added this stock to their portfolios, and I would advise fundamental investors to consider adding this stock to theirs as well.
Disclosure: Victor Selva holds no position in any stocks mentioned
