LONDON -- Shares of oil companies have recovered strongly since the mini-market meltdown of May. U.S. pair ExxonMobil
Rising oil and gas prices and a little more optimism in the equity markets are responsible for the rebound in the supermajors' shares. But are they still value at their current levels? And how do Britain's biggest shape up against their U.S. counterparts?
The tables below set out a number of valuation measures I'll be using to answer these questions.
|
Company |
Recent Share Price |
Revenue |
Historic P/E |
Forward P/E |
|---|---|---|---|---|
| ExxonMobil | $88.67 | 483 | 9.3 | 11.3 |
| Chevron | $113.32 | 246 | 8.3 | 9.1 |
| Royal Dutch Shell | 23.40 pounds | 476 | 8.4 | 8.3 |
| BP | 4.51 pounds | 240 | 7.7 | 7.2 |
|
Company |
Historic Dividend Yield (%) |
Forward Dividend Yield (%) |
P/TB |
ROA |
|---|---|---|---|---|
| ExxonMobil | 2.2 | 2.6 | 2.6 | 13.7 |
| Chevron | 2.9 | 3.2 | 1.8 | 12.6 |
| Royal Dutch Shell | 4.7 | 4.9 | 1.4 | 7.5 |
| BP | 4.4 | 5.0 | 1.7 | 5.9 |
All four companies are on trailing-12-month price-to-earnings (P/E) ratios in single figures, which on the face of it suggests the sector is out of favor with the market and may offer good long-term returns for contrarian value investors.
However, the picture changes a little when we look at forward 12-month P/Es. Analysts are expecting a little earnings growth from the two U.K. firms, so their forward P/Es come down a bit. Conversely, something of a drop in earnings is forecast for the U.S. pair, pushing their forward P/Es higher. I can't quite see why there should be this difference in forecast earnings between the U.K. and U.S. firms. But taking it at face value you have to say the sector still looks reasonably cheap, with only ExxonMobil moving up to a double-digit forward P/E.
Despite the mixed picture for forecast earnings growth, analysts are predicting all four companies will increase their dividend payouts in the 12 months ahead -- and by decent amounts. Shell's and BP's yields are comfortably above the U.K. market average and look very attractive. U.S. companies generally have less of a focus on dividends than their U.K. counterparts. ExxonMobil's and Chevron's yields, while significantly below Shell's and BP's, are actually pretty decent by U.S. standards.
The price-to-tangible book (P/TB) numbers also rather favor the U.K. pair because their assets are on a cheaper rating than their U.S. counterparts. However, offsetting that is the fact that the U.S. firms are earning a better return on their assets (ROA).
Company by company
On the valuation measures I've looked at, ExxonMobil is clearly on a premium rating. It's certainly arguable that this king of the supermajors deserves to be. However, despite the superior ROA, I'm not too keen on the P/E, yield and P/TB ratings relative to its rivals. I should say, though, that these ratings are low relative to ExxonMobil's own historical averages.
At the other end of the scale, BP is on a discount rating with the lowest P/E and highest dividend yield. Again, perhaps BP deserves to be. I think it does, given the legacy of the 2010 Deepwater Horizon disaster and the company's having such a lot at stake in a Russian joint venture with a bunch of oligarchs. I rate Russia as one of the least attractive places in the world to do business, not only because corruption is rife but also because of political risk. It's not hard to imagine a Western company waking up one day to find itself in a game where the dice are loaded against it.
Chevron and Shell look more interesting investment prospects to me at the present time. Overall, there's not much to choose between them on the measures I've looked at. Personally, as someone with a fondness for the tangible shareholder return of cash dividends, Shell edges it for me.
Striking it rich
Whatever the merits of the individual companies, I think it's fair to say that, despite the rally in share prices in recent months, oil and gas continues to be one of the more unloved sectors in the market. As such, the supermajors may indeed deliver good long-term returns for contrarian value investors.
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Further investment opportunities
