Major, integrated oil companies are not the kind of investment one owns for rapid growth. Rather, the investment thesis behind such companies stems mainly from three points: dividend income, dividend growth, and security. These come through a rock-solid balance sheet and massive diversification.
In the past I've written about two oil majors.One, ExxonMobil (XOM 1.37%) exemplifies the kind of "equity bond" mentality that Warren Buffett advises -- in fact, Berkshire Hathaway owns about 1% of ExxonMobil. It's a slow but steady winner, with a 44-year dividend compound annual growth rate, or CAGR, of 7.54% and a Volvo-safe balance sheet. Exxon is one of only three companies with AAA credit ratings from Standard & Poor's -- something not even the U.S. Treasury can claim.
On a very different note is Petrobras (PBR 0.20%), the largest oil company in Brazil. In my last article, I argued that despite the company's recent (and very long) string of political scandals, with allegations of money laundering and mismanagement -- a $5 billion planned refinery ballooned in cost to $20 billion, creating the most expensive refinery in human history -- it might offer a "dirty value" opportunity.
My investment thesis was that this was a play on Brazil's massive offshore oil deposits and that the management of its offshore divisions was actually proving itself competent. If the politicians who pack its board could get out of the way long enough for the offshore division to execute on its growth plans, Petrobras might be an opportunity for strong capital gains.
Since those articles were written, certain events have unfolded that I wish to cover, in order to better help long-term investors decide whether ExxonMobil and Petrobras deserve places in their portfolios.
ExxonMobil: what's changed?
In its latest earnings release the company reported mixed results:
- Net income down 4%.
- Earnings per share down 1% (due to $3 billion in share buybacks).
- Capital expenditure (capex) down 28%
- Daily production down 5.6%.
- Dividend raised 11%.
- EBITDA margin in 2003: 28.5%, last year 11.27%.
- Return on assets in 2003: 15.3%, currently 2.42%.
- Return on equity in 2003: 49.59%, today 5.38%.
- Total debt $136.2 billion, denominated in U.S. dollars (the company gets paid in Brazilian Reals, exposing it to currency risk).
Foolish bottom line
ExxonMobil is the kind of safe, "hold forever" dividend-growth stock that investors can rely on to do well whenever they buy on dips. Given the recent run-up, the case for buying now is weaker but still there due to a slight historical discount and the security of the dividend. On the flip side, Petrobras is a value trap with a track record that indicates investors should not trust its management with their hard-earned money.
