Last week, my Foolish colleague Alex Planes wrote a superb article offering the conclusion that "Cheap Oil Isn't Coming Back," an assessment with which I completely agree. Beyond that, though, I'd add, "And Cheap Gas Has a Brief Future, Too." With that in mind, it's crucial to look back at the recent earnings season to garner what we can about which major oil companies appear to offer the biggest boosts for our portfolios.
Earnings season typically involves similar results for virtually all of Big Oil -- which we probably should begin referring to as Big Oil and Gas. Barring the unusual, the factors driving companies' quarterly successes -- or lack thereof -- are generally led by commodities prices and downstream (refining) margins, which tend to be similar for all the integrated companies. As such, quarterly performances generally do little to separate the investment wheat from the chaff.
But the past quarter was somewhat different. With more variety among the metrics, the expanding importance of geopolitics, and some changes clearly in store for the trading of the commodities, it's become easier to discern a hierarchy among the large integrated companies. Indeed, I think we can identify a trio of companies that smart Fools (Iis there another kind?) simply can't ignore.
Chevron's up first
Let's begin by looking at Chevron (NYSE: CVX ) , which brought up the rear by waiting until last Friday to report its numbers. Nevertheless, it managed to overcome a 5% slide in its daily production and rode the combination of higher crude prices and stronger refining margins to more than double last year's third-quarter earnings. Fortunately, the production slide was temporary, based largely on maintenance outages and pipeline problems in the Far East. As such, I'm inclined to provide Chevron a spot among our powerhouse threesome.
And there are other key reasons to like the company. In the Gulf of Mexico alone, to the extent that the pokey permitting process allows, Chevron is as busy as a proverbial cat in a ... well, you know. There's the big, decade-old Tahiti field, from which output is still being increased as part of this year's effort to reach about 2.80 million barrels of oil equivalent per day worldwide. Beyond that, the company is endeavoring to start up a couple of other big Gulf fields -- Big Foot and Jack/St. Malo -- by 2014. That, of course, assumes it can make up for the time lost because of BP's (NYSE: BP ) Macondo well tragedy last year.
No pain from this gas
But as I indicated, those companies with abundant activity in natural gas, including liquefied natural gas (LNG) -- both in the U.S. and abroad -- stand an increased chance of adding shekels to our portfolios. That's another aspect of Chevron's strength. In Western Australia, as you'll recall, it holds a 47% position in the massive $43 billion Gorgon LNG project, where it's joined by ExxonMobil (NYSE: XOM ) and Royal Dutch Shell (NYSE: RDS-B ) , each of which has a 25% stake.
Then there's the Wheatstone LNG project, also in Western Australia, and also with Chevron at the helm, with 73.6%. Apache (NYSE: APA ) , Shell, and Kuwait Foreign Petroleum Exploration -- Kufpec -- have divvied up the remainder. The $29 billion project has been targeted for start-up in 2016, when the first shipment is likely to head for Japan.
As if big positions in both Gorgon and Wheatstone weren't enough, just last week Chevron's Australian subsidiary announced yet another discovery -- this time in the Carnarvon Basin, making for the company's 11th discovery in the area in the past two years. And on the other side of the world, Chevron, along with Exxon and ConocoPhillips (NYSE: COP ) , are among those having received nods to search for natural gas in Poland and, in Chevron's case, Bulgaria.
Shell's full of LNG
Royal Dutch Shell also doubled its earnings in the past quarter, chalking up a growth rate that one advertisement used to refer to as "a silly millimeter" beneath Chevron's. The company is casting a major lot with LNG, where it leads the world in production and distribution. That's a sufficient reason for placing the Anglo-Dutch giant next to Chevron as another member of Big Oil's most promising trio.
As an indication of the potential in natural gas -- obviously including LNG -- Shell's gas earnings jumped by a whopping 40% outside the Americas, while they eked out just a 1% increase in this part of the world. A large part of that massive differential stemmed from the fact that gas is sitting near a paltry $4 in the U.S., while it yielded $15 for Shell in Asia. That being the case, should we deny that the U.S. price is headed for higher ground? Indeed, Asia's levies appear to be headed even higher.
By golly, we're in the LNG game
Indeed, our country apparently is about to join the world of exporting LNG. Just last week, BG Group, a gas-centric company based in Reading, U.K., reached a pact with Cheniere Energy Partners (AMEX: CQP ) to buy LNG from a Gulf Coast facility. It appears that BG will spend about $8.2 billion with Cheniere during a 20-year period beginning in 2015. With this contract having been salted away, and given the tremendous expansion in our country's natural gas reserves, I'm willing to wager my eldest son that the new BG-Cheniere pact will become one among many in short order.
I won't become overly descriptive about the third member of the majors' most powerful trio. You probably won't be surprised that ExxonMobil has nailed down that position, largely by having spent $41 billion slightly more than a year ago to acquire Fort Worth-based XTO Energy, a major gas producer. The acquisition, which has subsequently been added to, turned the biggest of Big Oil into the major domo of Big Oil and Gas. Beyond that, last week the company advised the world that it had come upon a possibly significant gas discovery off the coast of central Vietnam.
Be careful where you step
So we now have our select Big Oil and Gas trio. Are all the companies equally attractive? Probably not, and here's why: I mentioned geopolitics earlier, and I frankly am concerned about Iraq's future for the companies, even in the short term. I simply can't see how we can force essentially all U.S. troops to skedaddle from the country and not be faced with eruptions emanating from next-door neighbor Tehran. I won't say more about the subject -- I don't work for the State Department -- except to note that, (importantly) unlike Exxon and Shell, Chevron has steered clear of the war-torn country. (Instead, it's the only member of Big Oil with an upstream gig with Saudi Arabia's Aramco.)
And then there's Russia. Several years ago, I began a Motley piece with the observation, "Only a few things are absolutely inevitable in today's world: death, taxes, and the Russian government's lusting after energy projects once they've been developed by Western companies." For instance, you're probably aware that Shell was squeezed out of the operatorship of the country's Sakhalin-2 project precisely five years ago.
I'm not certain of Shell's likely future with the Russkies, since, with the world running low on potential major oil finds, the Western companies have displayed a curious tendency of dusting themselves off after having been body-checked by Vladimir Putin's minions and heading right back into the game. Nevertheless, Exxon, which has had a more successful -- but hardly rosy -- experience with its own Sakhalin project, has agreed to a major venture with state-controlled Rosneft that'll cover the Russian Arctic, the Black Sea, and (are you seated?) the Gulf of Mexico.
Foolish bottom line
Now, with Putin likely to resume his role as the country's tough little president, ExxonMobil may fare just fine, but I feel better about Chevron's having pulled the plug on a venture with Rosneft earlier this year. So while all three of the companies appear to be gassed up and ready to enrich our portfolios, if required to pick one, I'd begin with Chevron.
Nevertheless, and without the slightest ado, I'd ascertain that Chevron is on your version of My Watchlist, along with ExxonMobil, and Shell. If not, just follow the links.
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