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"Big oil" stocks have been hit hard by market declines in recent weeks. While there have been numerous discounts in the oil patch over the last few months, the major independent and integrated U.S. names had managed to avoid the volatility. That is, until recently.
Chevron (NYSE: CVX ) , which reported a not-so-great quarter, dropped steeply on its earnings announcement, as investors seemed disappointed by the company's guidance. Chevron has been down by almost 11% since its most recent high in October. ConocoPhillips (NYSE: COP ) has been drifting downward as well and is now off by almost 14% since October.
For investors who want energy exposure but are only comfortable with the bigger blue chip names, both ConocoPhillips and Chevron represent a compelling choice right here. But which one is the better choice? To be clear, I think that both are very good businesses now trading at reasonable valuations, but operationally speaking ConocoPhillips and Chevron are two pretty different stories.
In the last couple of years, ConocoPhillips spun off its refining business and refocused itself on higher-growth, higher-margin assets in more friendly business environments. ConocoPhillips has gotten out of Kazakhstan, Nigeria, and Libya while redoubling efforts in the Canadian oil sands, the Gulf of Mexico, the North Sea, and U.S. shale plays.
Chevron, for its part, remains a global oil and gas company with significant operations around the Middle East, Central Asia, and Latin America, places that -- because of their less-than-friendly business environments -- ConocoPhillips has avoided. One of Chevron's biggest projects is in Angola, and it is putting significant resources into exploring the Vaca Muerta shale in Argentina, a country which seems to be leaning more leftward every day.
While ConocoPhillips has done well in improving profitability metrics like cash margin per barrel and return on invested capital, it has a long way to go before it can rival Chevron. In fact, with a cash flow margin in the high $30's at $110 Brent crude, Chevron is the most profitable company in its peer group. Return on invested capital metrics tell much the same story: ConocoPhillips sits at an efficient 10.9% over the last 12 months, but Chevron is still well ahead at 15.4% over the same period of time.
Chevron is not only known for its world-class profitability but also for its fortress balance sheet. ConocoPhillips, on the other hand, has been a work in progress as it rearranges its assets and spends lots of capital to open new development projects.
Although Chevron has more debt on an absolute basis, it is also a bigger company. On a debt-to-cash-flow basis, however, ConocoPhillips' debt sits at 1.4 times operating cash flow over the last 12 months; Chevron's sits at just 0.5x.
Regarding growth, few major oil companies, if any, can match what ConocoPhillips has right now. While the super-majors currently have projects scattered across the globe, ConocoPhillips has focused its capital on the Athabasca oil sands and on the shale plays of the U.S. Both of these have driven ConocoPhillips' 3%-5% annual production growth target, and soon investments in Malaysia and the North Sea will add to production as well.
Meanwhile, Chevron's four mega-projects, two of which are in the Gulf and two of which are in Western Australia, have had mixed success. Both Australian labor costs and the Australian dollar have marched higher and have caused large cost overruns, which will take a bite out of the the long-term economic viability of these projects. For example, Chevron's Gorgon LNG project, originally expected to cost only $39 billion, has seen its cost "blow out" to $54 billion.
Valuation, bottom line
A comparison between Chevron and ConocoPhillips can really be summed up by this: Chevron is more efficient and has a better balance sheet than ConocoPhillips. ConocoPhillips, however, has the better growth prospects and a very compelling asset portfolio.
Let's take a brief look at valuations. ConocoPhillips has been discounted to Chevron based on P/E since the beginning of this year. Perhaps this was due to a good quarter on ConocoPhillips' part and a less-than-good quarter from Chevron. This risk-averse market may also prefer Chevron, a company that is regarded as more of a sure thing than ConocoPhillips.
But for investors who are in it for the long run, I believe that ConocoPhillips is actually a better choice. Sure, ConocoPhillips' margins are lower and its balance sheet is less pristine than Chevron's, but ConocoPhillips is also expanding its margins steadily and improving its balance sheet, too. Most of all, Chevron will be hard-pressed to reach ConocoPhillips' growth rate anytime soon. Although I like both companies, I believe that ConocoPhillips is the better choice right now.
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