It's been a rough ride for big oil since mid-June 2014, when most oil-industry stocks began to trend downward. Things have been looking up -- a little -- in 2017, but the top integrated majors are still off their highs by double-digit percentages while the S&P 500 is up more than 25%.
The hardest-hit companies among the integrated majors are Total SA (NYSE:TOT), down 29.9%; BP (NYSE:BP), down 32.5%; and Royal Dutch Shell (NYSE:RDS-A)(NYSE:RDS-B), down 32.9%. But just because a company has fallen farther doesn't mean it's more likely to outperform. Let's look at these three beaten-down big-oil stocks to see if they might be worth buying.
Total SA: the little major that could
In the world of integrated majors, Total SA is the runt of the litter. Its market cap is just $123.7 billion, larger only than BP's $115.2 billion, while its annual revenue of $127.9 billion is lower than all but Chevron's $114.5 billion. Compare that with Shell's $234.2 billion market cap or its $240 billion annual revenue, and you get a sense of how much smaller Total is.
But Total is poised for growth. After an impressive Q2 2017, the company has cash to deploy, and plenty of options on where to put it. The company just outbid BP and Shell to win a 30% stake in Qatar's offshore Al-Shaheen oil field, which, according to Total CEO Patrick Pouyanne, is a "complex field" that will require significant investment. The company also signed a deal to develop phase 11 of Iran's South Pars gas field starting in 2021.
These join the company's other projects in locations as diverse as Iraq, Ireland, Argentina, Russia, and Senegal. Total looks poised to deploy its cash hoard to fuel continued growth, and while it may not quite be a "bargain," it's certainly looking like a good value at today's prices.
BP: high yield, high breakeven
For nearly two years, BP and Royal Dutch Shell have been going back and forth in claiming the title for highest big-oil dividend yield. Currently, BP holds the crown with a yield of just over 6.8%, compared with Shell's 6.6%. Although that's liable to switch at any time, fundamentally, their dividends are the same.
But something else is high at BP that isn't so hot for investors: its breakeven price. The breakeven point for an oil company is the oil price point above which the company earns a profit. Some big oil companies (and quite a few smaller ones, too) have lowered their breakeven points to $50 a barrel, or even lower, which has paid off as oil prices have been hovering around that mark for the past year.
But BP surprised everyone when it announced that its breakeven point would rise to $60 a barrel this year, meaning it not only isn't profitable at today's oil prices, but it also wouldn't have been profitable at the oil prices of mid-2015! BP CEO Bob Dudley has tried to reassure concerned investors that the company's breakeven price would drop to $35 or $40 a barrel by 2021, but that's a lot of quarters to wait, even with such a high dividend yield as an incentive.
In addition, the company announced in June that it would be writing down $750 million in Q2 2017, a result of unsuccessful exploration campaigns in Angola. With all this in mind, BP doesn't look like much of a bargain at present.
Royal Dutch Shell: best in class
Royal Dutch Shell's dividend yield is practically the same as BP's, but that's where the similarities end. Shell has been able to lower its breakeven to become profitable with oil prices at $50 a barrel, and profitable it is. In fact, profit in its recently reported Q2 2017 more than tripled from the year-ago quarter.
Shell is also making investments for an uncertain future. CEO Ben Van Beurden has recently stated he thinks demand for oil could peak as early as the late 2020s, as electric cars become a viable option for consumers. He's also preparing for a future in which oil prices never recover to their former highs.
Shell is putting its money where its CEO's mouth is. The company has been selling underperforming assets to help reduce its breakeven. Last year, it made a major purchase of BG Group, which gives Shell additional exposure to liquefied natural gas -- a smart move if you believe oil prices and demand aren't going to rise much further.
Add to this its generous dividend yield and its excellent recent performance, and Shell looks as if it may very well be a bargain at its current share price.
Total and Royal Dutch Shell look like better bargains today than BP, but their performance is going to depend on many factors, including where oil prices go, what happens to global oil supply, and -- especially for Total -- how the companies' exploration projects pan out. Under the right global conditions, all three of these companies could be big winners.
But if you're looking for the best prospect of the bunch, I'd go with Royal Dutch Shell, to earn a handsome dividend from a company that's firing on all cylinders.