The stock market freaked out -- justifiably -- when U.S. benchmark WTI crude prices turned negative on April 20. Even though it was largely due to a technical issue related to expiring contracts, North America's oil oversupply is threatening to overwhelm available storage capacity and turn that brief technical quirk into a lasting problem.
Of the five integrated oil majors -- ExxonMobil (XOM -0.14%), Chevron (CVX 0.49%), Royal Dutch Shell (RDS.A) (RDS.B), BP (BP -0.83%), and Total (TTE -0.33%) -- one stands out as having a surprising defense against a return of negative U.S. oil prices.
Here's which one, and why you should take notice.
Image source: Getty Images.
Roam around the world
All five of the integrated majors are global companies, with worldwide footprints. ExxonMobil and Chevron are the only ones headquartered in the U.S., but all five have U.S. and Canadian operations.
Right now, those operations are problematic, as prices for crude pumped in North America are lower than for oil extracted in most other parts of the world. WTI Crude briefly hit negative $37.63 a barrel, and is currently trading at just under $17 a barrel. By comparison, the April low for international benchmark Brent Crude only fell to $15.98 a barrel, and is currently trading at about $21.50 a barrel.
This isn't a new phenomenon: Over the past two years, Brent Crude prices have consistently been about $5/barrel to $10/barrel higher than WTI Crude prices. That may not seem like much, but right now, it's roughly a 25% premium. Other North American benchmarks (which do exist, even if we don't talk about them as much) are faring even worse against Brent. The current price of the Canadian Crude Index is just $10.67 a barrel. The Mexican Crude Basket price is just $8.54 a barrel.
In other words, the less exposure a company has to North American crude prices right now, the better.
Northern exposure
Of the five oil majors, one has far less exposure to North American crude oil than the others, and it isn't even close. Here's a chart showing the percentage of each company's liquids production that comes from the U.S. or from North America (different companies report this data differently). I think you'll spot which one is not like the others:
| Company | Percentage of 2019 Liquids Production from U.S./North America |
|---|---|
| Chevron | 38.8% from U.S. (also has Canadian production) |
| BP | 37.4% from U.S. (also has Canadian and Trinidadian production) |
| ExxonMobil | 27.1% from U.S. (19.6% from Canada and other North/South American) |
| Royal Dutch Shell | 29.4% from North America (primarily U.S. and Canada) |
| Total | 10% from North and South America combined |
Source: Company press releases and websites. "Liquids" includes oil and natural gas liquids. Chart by author.
Surprisingly, Total produces a smaller percentage of its oil in all of North and South America than at least three (and probably all four) other oil majors derive from the U.S. alone!
Its entire North American oil production derives from partial stakes in three Gulf of Mexico fields and two Canadian oil sands fields. That's it. So if Total's management decided to simply exit the North American market entirely, it wouldn't take as big of a production hit as its peers would. And if Total sticks around, the pain it will suffer from those lower oil prices will be minimal by comparison.
Not the only advantage
If Total were a mediocre company that just lucked into a lack of North American assets, it wouldn't be much of a buy. However, there are other reasons to like Total.
The company is currently sitting on a $27.4 billion in cash -- the largest cash pile among the oil majors. Its total long-term debt of $61.4 billion is middle-of-the-pack, but the ratings agencies still assign it an investment-grade credit rating of Aa3/A+/AA-, meaning it should be able to access additional capital if needed during this oil price slump. To help ensure it can continue to pay its dividend -- currently yielding a mouth-watering 8.6% -- management has slashed its 2020 capital expenditures by 20%.
All told, Total looks like the most compelling investment among the oil majors now.
The right time
The North American oil and gas industry is undergoing a lot of turmoil with demand plunging while supply remains high. That's reflected in the rock-bottom crude oil prices we're seeing. The market has already hammered North American production companies, but there could be plenty of pain to come in the next few months or years.
Not only does Total have comparatively low exposure to the North American crude oil market, but it has a solid balance sheet and the advantages of scale shared by its fellow oil majors. That makes it a top pick among oil stocks right now, if you're a long-term investor who doesn't mind some near-term volatility.
