Can BP Outperform Chevron?

LONDON -- If you're interested in building a profitable, diversified portfolio, then you will often need to compare similar companies when choosing which share to buy next. These comparisons aren't always as easy as they sound, so in this series, I'm going to compare some of the best-known names from the FTSE 100 (UKX), FTSE 250 and the U.S. stock market.

I'm going to use three key criteria -- value, income, and growth -- to compare companies to their sector peers. I've included some U.S. shares, as these provide U.K. investors with access to some of the world's largest and most successful companies. Although there are some tax implications to holding U.S. shares in a U.K. dealing account, they are pretty straightforward and I feel are outweighed by the investing potential of the American market.

Today, I'm going to take a look at oil supermajors, BP (BP 1.28%) (BP 1.01%) and Chevron Corporation (CVX 1.20%). All data is sourced from Morningstar, Reuters, and company reports.

1. Value
The easiest way to lose money on shares is to pay too much for them -- so which share looks better value, BP, or Chevron?

BP and Chevron appear quite closely matched in the value stakes, but BP edges ahead decisively with its lower P/B and P/S ratios.

However, BP's notably low P/S ratio could be a double-edged sword, as it reflects the market's lack of confidence in its future plans; by valuing the company at just 0.3 times one year's revenues, investors could be suggesting they expect a sharp fall in revenue or profitability. The main reasons for this are that it is not yet clear what the limit of BP's liabilities will be in the U.S., nor how it plans to deliver new growth.

2. Income
With low interest rates set to continue for the foreseeable future, dividends have become one of the most popular ways of generating an investment income. How do BP and Chevron compare in terms of income?

BP offers more attractive yield, but the company was forced to cut its dividend dramatically after the Gulf of Mexico disaster in 2010, and next year's forecast dividend of 24 pence per share is still 33% less than the 36 pence BP paid out to shareholders in 2009.

In contrast, Chevron offers a more modest 3.4% yield, but its dividend growth history is attractive, averaging 9% per year over the last five years. What's more, Chevron has increased its dividend every year for the last 24 years, and it doesn't face the same reputational issues and costly damages claims that BP has to deal with. I think that these advantages give Chevron the edge on income.

3. Growth
Even if your main interest is value or income investing, you do need to consider growth. At the very least, a company needs to deliver growth in line with inflation -- and realistically, most successful companies need to grow ahead of inflation if they are to protect their market share and profit margins.

How do BP and Chevron shape up in terms of growth?

The growth statistics for these two oil giants tell an interesting story. Although Chevron has managed to grow its earnings at an attractive rate, some of this has been due to share buybacks. Profits and earnings per share are expected to fall this year, as Chevron struggles to boost flagging production output. In the third quarter of this year, Chevron produced less oil and gas than at any time since 2008. On the other hand, the American oil giant currently has a cash balance of $21 billion -- higher than both Exxon-Mobil and Royal Dutch Shell, according to figures compiled by Bloomberg.

Chevron's mission is obvious -- it must use some of that cash to make acquisitions and boost output and revenue.

For BP, revenue growth has been stronger over the last five years, but earnings growth -- unsurprisingly -- has been hammered by the impact of the Gulf of Mexico oil spill. What's more, the company has to find a way of replacing the substantial profits that came from its Russian joint venture.

Should you buy BP or Chevron?
BP and Chevron are both interesting investments and both look attractively priced, in my view, but at present I believe that Chevron is the safer buy for most investors.

Uncertainty over the final cost of the Gulf of Mexico oil spill remains an issue for BP, as does its current suspension from competing from new U.S. federal contracts -- it is not currently allowed to bid for new exploration blocks or compete for contracts to supply federal agencies with fuel. This situation is likely to persist at least until BP has resolved the civil damages claims it faces under the Clean Water Act, which are likely to lead to a fine of between $4.9 billion and $21 billion, depending on whether it is found guilty of simple or gross negligence.

While both companies need to deliver new growth, it's hard to deny that Chevron has several advantages over BP in this area. Anyone buying BP shares has to believe that BP will be able to settle its outstanding damages claims while remaining strong enough financially to invest in new growth -- something that's far from certain.

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