Please ensure Javascript is enabled for purposes of website accessibility

Better Buy: ConocoPhillips vs. Royal Dutch Shell

By Tyler Crowe and Matthew DiLallo – Jul 20, 2016 at 8:17AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Both ConocoPhillips and Royal Dutch Shell are in the midst of changing their stripes to be more profitable companies, but which one is the better investment?

Image source: Getty Images.

Just about every company in the oil and gas business has taken a big hit over the past couple of years thanks to sliding oil prices. Some have been hit much harder than others, though. Case in point, both Royal Dutch Shell (RDS.A) (RDS.B) and ConocoPhillips (COP -0.60%) -- two giants in the oil and gas production business -- have suffered much more than their similar-sized peers. 

COP Chart

COP data by YCharts.

With both companies looking to make big moves as of late to become more profitable in the future, which one is the better buy? We asked two of our contributors to plead the case for each company. Here's what they had to say. 

Shell looks like it is shaping up

Tyler Crowe: The first thing that's going to make me gravitate more toward Royal Dutch Shell over ConocoPhillips is the greater diversification of its revenue stream. After ConocoPhillips spun off its refining, logistics, and marketing businesses in 2012, all of its future profits became completely reliant on oil and gas prices remaining strong enough to generate solid returns. ConocoPhillips may be doing a decent job as of late to lower its costs and generate profits at even lower oil prices, but there's still a lot of speculation built into the business. 

Royal Dutch Shell, on the other hand, has a much more diversified revenue stream that touches every part of the oil and gas value chain from the moment a reservoir is discovered to when the gasoline goes into your tank. This helps to make profits more consistent and helps to generate cash throughout the commodity cycle. 

What also makes Shell such a compelling stock right now is that the company looks to really be getting its act together in terms of generating profits. Shell has been known for years as the technical one in the integrated oil and gas business. The player that looks to turn profits from places others didn't think possible. The problem was that this typically meant those profits margins weren't as good as those of its competition, and the company's returns on capital suffered because of it. 

Today, though, CEO Ben van Beurden has taken some steps to shed Shell's production-over-profits moniker by focusing on fewer projects with higher returns. It has halted its expensive exploration work in the Arctic and has divested itself of several lower-return assets while bolstering its position in LNG production through its investment in BG Group. This turnaround is a fascinating thing to watch, and on the surface, it looks as though it could be a way to make Shell a much more compelling investment over the long term. When you also consider Shell's share price and its 6.6% dividend yield, it looks like it could be a better long-term buy than ConocoPhillips. 

Prioritizing returns over growth

Matt DiLallo: There's no doubt about it, an investment in ConocoPhillips is a bet on higher oil prices. As an independent oil and gas producer, the company makes all of its money from production, with its profits ebbing and flowing along with prices. That said, the company is making several business model changes as a result of the downturn to capture even higher profits when prices rebound.

The first shift is getting out of deepwater exploration, which is costlier and carries more risk than other development projects. Not only do these projects take years to deliver any production, but they require a massive upfront investment that only pays off at higher oil prices.

The other significant change is a shift away from increasing production by an absolute number, instead seeking to grow on a per-share basis. Before the downturn, the company's plan was to expand production by 3% to 5% per year. However, growing for the sake of growth doesn't always pay off. This uneven performance is why the company is now forcing expansion capex to compete for capital with share buybacks, which it believes will improve its returns going forward.

Because of its returns-driven approach, the nimbler ConocoPhillips should outperform its big oil rival in an improving oil market. 

Matt DiLallo owns shares of ConocoPhillips. Tyler Crowe owns shares of ExxonMobil. The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends Chevron. 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.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
RDS.A
ConocoPhillips Stock Quote
ConocoPhillips
COP
$123.51 (-0.60%) $0.74
Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
RDS.B
Chevron Stock Quote
Chevron
CVX
$183.31 (1.26%) $2.28
Exxon Mobil Stock Quote
Exxon Mobil
XOM
$111.34 (0.72%) $0.80

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
349%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.