Legendary investor Warren Buffett told us to "be fearful when others are greedy and greedy when others are fearful."
Well, there's plenty of fear to go around in the energy industry these days, from persistently low oil prices to geopolitical concerns. And the stock prices of big oil companies have taken big hits. Is it time for smart investors to start getting greedy and buy? Let's check on beaten-down big oil stocks ExxonMobil (NYSE:XOM), BP (NYSE:BP), and Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) to see which -- if any -- look like bargains right now.
ExxonMobil, the biggest of the big
Despite some pretty solid fundamentals, industry behemoth ExxonMobil has taken its lumps along with the rest of the integrated majors since the current weak oil market began in 2014:
Starting in 2016, the stock began to show some life, before sinking lower again this year. This despite Exxon's status as the only integrated major with positive free cash flow and its best-in-class credit ratings of Aaa from Moody's and AA+ from Standard & Poor's. The company's return metrics, like return on equity and return on capital employed, are among the industry's highest, a sign of good management.
So, Exxon may be strong, but is it a "bargain?" Traditional earnings ratios are of limited help here, because sector earnings have fallen to a degree that such metrics -- like the PE ratio -- look sky-high across the industry, or are unavailable because a company's earnings are in negative territory.
A good proxy metric, though, is dividend yield, which gives us a sense of how cheap the stock is relative to its dividend. And ExxonMobil's dividend payout hasn't been cut during the recent slump, which would drastically alter the yield.
In fact, as you can see from the chart below, ExxonMobil's current yield of about 3.7% is near the high end of its 10-year range, indicating that the stock may indeed be in bargain territory right now:
BP doesn't stand for "bargain price"
Like Exxon, BP's dividend yield is also at the high end of its range, although in 2010, the company slashed its then-record-high dividend back in the aftermath of the Deepwater Horizons oil spill. At nearly 7%, BP's yield is nearly twice that of ExxonMobil's. But that doesn't necessarily mean BP's stock is twice as cheap.
You see, BP has a problem Exxon doesn't: It can't seem to get its breakeven point low enough. The breakeven point for an oil company is the oil price point above which the company earns a profit. Some big oil companies have gotten their breakeven points down to $50/barrel, and luckily for them, oil prices have been hovering just north of that level so far this year.
But BP has announced its breakeven point will rise to $60/barrel this year, which means it isn't profitable at today's oil prices (or at the oil prices of the last two years). After a public backlash, BP CEO Bob Dudley reassured investors that the breakeven price would drop to $35/barrel-$40/barrel by 2021. That's a long time to wait, though, even with a 7% dividend in return for your patience. As a result, BP isn't looking like as much of a bargain as Exxon at the moment.
Royal Dutch Shell scores high
Royal Dutch Shell's breakeven price is far lower than BP's. In fact, many of the company's newer deepwater oil projects -- including those in the Gulf of Mexico and Brazil -- are below $40/barrel. While Shell's CEO Ben Van Beurden hasn't given a specific breakeven price, some industry analysts put it and Exxon's at about $50/barrel.
However, Royal Dutch Shell combines Exxon's breakeven price with a best-in-class dividend yield of about 7.4%. That dividend is also near a record high, indicating that Shell, too, may currently be in bargain territory.
There's another question mark when it comes to evaluating Shell. The company is wrapping up the integration of its recent major purchase, gas giant BG Group. While this gives the company additional exposure to the booming liquefied natural gas market -- for which global demand is expected to increase by 4% to 5% per year through 2030 -- it will also force Shell to sell off more than $30 billion in assets by 2018. Like Shell's breakeven point, those assets haven't been identified. They'll probably be some of the company's less profitable assets, but nobody knows for sure.
All of this makes Shell a probable bargain at its current prices, but it's not a stock without risk.
Indeed, where the price of oil goes over the next decade is going to be one of the biggest determinants of the success -- or failure -- of these and other big oil companies. And nobody knows where that price is heading. If per-barrel oil prices collapse, say, below $30, nobody is going to think these stocks are bargains at today's prices. On the other hand, if oil prices jump to $75/barrel, people who jumped into these stocks now will be hailed as geniuses for getting in when they did.
That said, ExxonMobil is looking like one of the best big oil bargains right now, with Shell probably a bargain as well. BP might be a bargain if it can get its breakeven point under control, but the other two are probably better bets for the time being.