2 Oil Majors Cashing in on Important Energy Megatrends

Offshore drilling, LNG exports, Alberta tar sands, and shale oil are some of the most promising megatrends in energy today. This article highlights two excellent oil majors taking advantage of these trends and provides an update on their efforts to enrich long-term investors.

Jun 3, 2014 at 11:16AM

Energy booms are making headlines today, with everything from America's resurgent oil and gas production to Canadian tar sands to huge offshore oilfield discoveries tantalizing investors with the prospect of striking it rich on the back of black gold. A few weeks ago, I wrote about two of my favorite major oil companies, Chevron (NYSE:CVX) and Suncor Energy (NYSE:SU).

In my article on Chevron, I explained why it was the best of the major integrated oil companies, with superior margins, operational efficiencies, and a higher yield than competitors such as ExxonMobil. In my article on Suncor, I explained why this highly undervalued play on Canadian tar sands was a dividend growth investor's dream stock, with a five-year dividend growth rate of 35% and plans for large-scale production growth over the next several years.

Since those articles were written both companies have announced their earnings and provided updates to their growth initiatives. This article will highlight how both companies are doing and examine whether the original investment theses still hold. 

Chevron's terrible quarter: why it doesn't matter
Investors in Chevron may have been surprised at the company's most recent results, and not in a good way:

  • Q1 earnings down 27%.
  • U.S. upstream earnings down 19.5%.
  • International upstream earnings down 29.5%.
  • U.S. refining earnings up 213%.
  • International refining earnings down 49%.
  • Dividend raised 7%.
  • $1.25 billion in share buybacks during the quarter.

How can I claim that Chevron's quarter is a buying opportunity when on its face the results appear terrible, with decreasing production, lower oil prices, and major production snags in Kazakhstan?

For the same reason why management felt confident enough to buy back over $1 billion in stock and raise the dividend; the long-term growth story remains intact. 

The key to Chevron's investment thesis is two-fold: its great track record as a high-yielding dividend growth stock (25 consecutive years of increasing dividends) and management's plan to raise production by 20% through 2017 while keeping production costs flat. This will increase the company's already industry-crushing margins (it has a net margin 50% better than the industry average at 9.4% compared to 6.1%) and allow it to grow its dividend at 8%-10%, slightly faster than its 20-year dividend CAGR of 7.26%.

Several upcoming projects are key to management's growth goals, and they take advantage of three major energy megatrends: offshore production in the Gulf of Mexico, oil shale, and LNG (liquefied natural gas) exports.

Estimates place the recoverable oil in the Gulf of Mexico at 38 billion barrels -- of which nine billion have been extracted.

Into this remaining 29 billion barrel potential steps Chevron with three new rigs coming online through 2015. These rigs will produce 300,000 barrels/day, of which Chevron owns the rights to half -- a 5.7% production increase from its current 2.6 billion barrels/day.

Chevron's other major project includes LNG exports, forecast to double by 2025, which will require an additional 100 MTPA (million tons/year) in global gas capacity. The company's Gorgon project (located in Australia) is expected to produce 15.6 MTPA, the equivalent of 400,000 barrels of oil/day (bpd). With several major international shale projects in progress as well, management is confident about achieving its stated 20% production expansion by 2017.

Suncor: record quarter, excellent growth prospects
Suncor is the largest oil producer of Alberta Tar sands (it currently produces 24% of total tar sand oil), which are the largest petroleum deposits on earth: 2.5 trillion barrels of oil sands, 170 billion of which are currently economically recoverable with today's technology. The company recently crushed analysts' earnings expectations by 33% (the highest in the company's history). On a trailing-12-month basis, earnings were up 50% year-over-year, primarily due to soaring West Canadian Select, or WCS, prices. Increases in available pipeline and rail cars for shipping Canadian oil have reduced a major glut and caused the price of WCS to increase by 21% recently (and 60% since November). 

Oil production was down 10% from last quarter, though oil sands production was up 8.8% year over year. However, management did reaffirm its guidance, which calls for capital costs to decrease in the coming quarters along with its plan for 55%-60% production growth. These plans consist of three major mining initiatives that combined will produce 357,000 bpd with production lives of 40 to 50 years.

With production of Canadian oil expected to quadruple from 1.6 million bpd to 6.2 million bpd by 2030, Suncor is not only well positioned to take advantage of this megatrend but also to return massive amounts of cash to shareholders. Since 2011 the company has bought back 8% of its shares and in April of 2013 raised its dividend by 50%, followed by a 9% raise in February of 2014. 

Foolish takeaway
Suncor and Chevron continue to be two of the safest dividend growth plays on major energy megatrends such as Canadian tar sands, offshore drilling, and LNG exports. Both companies remain historically undervalued and interested investors should not hesitate to use short-term problems and/or price weakness to add to their holdings.

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Adam Galas has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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