Are These Oil Majors Going in Different Directions?

Big Oil is big business, but with so many industry competitors across the globe, separating the winners from the possible losers can be a difficult proposition. Thankfully, a new analyst report from Morgan Stanley contains a multi-year outlook for the global oil super-majors, and investors might be able to take cues from the research to make better informed investing decisions.

According to new research, differing production outlooks, and by extension expected cash flow generation, are likely to result in diverging paths ahead for Big Oil members ExxonMobil (NYSE: XOM  ) and Total (NYSE: TOT  ) . At the same time, taking a long-term view on future production means industry peer Statoil (NYSE: STO  ) stands as a favorite among the oil majors. When combined with the recent developments out of these majors, it's not difficult to see the different paths being charted by ExxonMobil, Total, and Statoil.

Go where the growth is
The major culprit behind the bearish stance on ExxonMobil stems directly from a lack of significant project start-ups. A major weakness of ExxonMobil's, according to the Morgan Stanley research, is its limited growth opportunities. Between 2014 and 2016, ExxonMobil's new fields are expected to add just 5.8% to production, a total which lags behind the 7.7% expected of the company's peer group on average.

Judging by ExxonMobil's recent results, it's not hard to see that these assertions are justified. You may recall that ExxonMobil shocked the market when it reported second-quarter profit that fell 57% year over year, due to lower production and weak refining results. All told, ExxonMobil earned $1.55 per share, representing its lower quarterly EPS since September 2010. That figure fell well short of analyst expectations, which had called for $1.90 in per-share profits.

Future growth is likely to be better for European majors Total and Statoil, which should both benefit from stronger upstream results. Total's upstream growth is expected to clock in at 3.5% per year through 2016. This stands above the 3.4% expected of the sector as a whole.

Ditto for Statoil: The Norway-based major is expected to grow overall operating cash flow by 3.8% compounded annually through 2016, which again represents above-average growth. Like Total, pronounced strength is expected to come from outperformance in its upstream operations.

Are Exxon's buybacks in jeopardy?
In all, Exxon is expected to produce just 2.6% compound annual growth in operating cash flow through 2016, representing one of the lowest projections among the entire group. This is expected to adversely impact the company's ability to buy back stock in the future. Again, if we incorporate recent actions out of Exxon, we can see there's more than enough precedent to back up these claims.

Exxon maintains a rock-solid dividend policy. The company gave investors an 11% dividend increase earlier this year, representing the 31st consecutive year of a dividend boost. While Exxon's dividends aren't in question, investors should be asking themselves whether the company's pattern of huge share buybacks can continue as well, if disappointing production is indeed on the horizon.

After all, ExxonMobil's share buybacks dropped to $4 billion in the most recent quarter. Prior to that, the company had repurchased at least $5 billion of its own stock for ten consecutive quarters. And, looking back even further, Exxon has bought back $207 billion of its own stock over the past decade. Going forward though, Exxon's buybacks are expected to drop again, to $3 billion in the current quarter. While that's still a huge sum, it means even more pressure on Exxon's earnings per share.

The vast resources Exxon has devoted to buybacks have come at the expense of the company's dividend, which, at 2.9%, ranks as one of the lowest among the industry. Total and Statoil have much more generous payouts, near 5% in both cases. To be fair, both Total and Statoil investors are subject to foreign withholding taxes on their dividends, but even so, their payouts still compare favorably to Exxon's.

Should you prefer the European majors?
In the end, there's no need for ExxonMobil investors to panic. The company will continue to produce steady, if unspectacular, growth. Moreover, investors will still receive those quarterly dividend payments, and the company is likely to continue its streak of annual dividend increases for many years.

That being said, Exxon has under-delivered in recent quarters and its future outlook leaves a lot to be desired. Moreover, Total and Statoil are expected to outperform Exxon and the industry itself on several metrics, and each pays a hefty 5% yield. As a result, for savvy investors who want to know where the very best opportunities are, Total and Statoil may be the winners among these three oil majors.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 09, 2013, at 12:00 PM, PEStudent wrote:

    This article glosses over the details of production, etc. Exxon has increased proven reserves for 17 straight years and, before 2013, had wrongly accented natural gas so that liquids (oil) became only 49% of all reserves. That's being corrected and is now 51%.

    The articles claim of a "lack of significant project start-ups" is due to the lag time between the shift to oil and the start-ups in exploiting it. So the 5.8% vs 7.7% increase in production should not be a lasting problem and should provide a bargain in stocks while it lasts.

    Finally, when mentioning "peer group," what's Total and Statoil doing there? The two added together barely have 1/2 Exxon's market cap.

  • Report this Comment On October 13, 2013, at 6:42 PM, EllenBrandtPhD wrote:

    STO's stock has done pretty well in Europe. Its fortunes in the US are entirely due to the still too weak NOK against the USD.

    I expect that to change for good as early as this week, with signs that the Japanese are finally willing to say "Good Enough" and accept a Yen in the 95-90 range, instead of the 105-100 range that has hurt pretty much everyone else in the entire world.

    The Biggie for STO is going to be Erna Solberg making good on her campaign platform promise and rescinding the last tranche of confiscatory taxes on STO imposed by the Socialists - and probably going even beyond that. STO in turn has vowed to keep developing offshore Norway - and has considerably picked up its hiring in Aberdeen with that in mind. Lofoten being temporarily off the table doesn't matter for STO right now, since it was a 2015 exploratory start at the earliest, anyway. It is Castberg that matters, along with other possibilities.

    In any case, the moment new tax breaks are announced, expect the stock to soar. STO has the highest analyst rating among its peers, and is still kept under a ton of bricks - something is clearly out of whack.

  • Report this Comment On October 16, 2013, at 10:48 AM, EllenBrandtPhD wrote:

    One of STO's key directors steps down to become Norway's new foreign minister - i.e. Secretary of State.

    Slash in tax rates should have come in already. No doubt it will happen. This cements it.

    STO's analyst rankings and targets keep improving, while stock continues to be muted next to its nearest peers. This is called Cognitive Dissonance. And also Opportunity.

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