The investment thesis on Big Oil companies normally does not change much in a few months time. But there haven't been many instances in which the price of oil has fallen as fast as it has in the second half of 2014. The slide of oil from $115 per barrel in late June to below $63 today has taken many of the big names in oil with it.
When stocks of industry stalwarts including ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) plunge more than 15% in a matter of months, it's worth reexamining whether our original investment thesis holds, and whether these big price plunges suggest that one company is the best buy today.
All these companies have diversified operations ranging from production all the way down to retail sales, so the drop in oil prices has not affected their share prices as much as it has many of the independent oil and gas producers. That being said, each of these companies has varying exposure to oil, and plunging oil prices will impact some more than others. Let's start with production in general.
|Company||% of earnings from production of oil and gas|
|Royal Dutch Shell (NYSE:RDS-B)||76%|
All these companies generate a vast majority of their earnings from production, although those numbers have slipped this year as some companies' production volumes have fallen, along with price realizations dropping ever so slightly. Chevron is the most dependent on production for earnings, but it's not a massive change between the least exposed to the most. In that context, let's see how much of each company's production is in oil.
|Company||% of production from oil|
|Royal Dutch Shell||48%|
There are two caveats to consider when looking at these numbers. First, production mix is not necessarily indicative of the breakdown of revenue. Since the average selling price per barrel equivalent of oil is considerably higher than that of gas, these numbers are more of a rough gauge than a clear breakdown of oil revenue and gas revenue -- unfortunately, most Big Oil companies don't provide that kind of detail in their reporting.
The other thing to consider here is that just about everywhere outside of the United States, the price of natural gas is generally indexed to oil through some sort of fixed multiple. This number can vary depending on where that gas is sold, but in generally it means wild price swings can impact gas sales.
That being said, it's clear Chevron is heavily weighted toward oil, while the rest of the group is very close to an even production split. So depending on how the price of oil swings, Chevron is likely to see some of the biggest impact on its free cash flow generation.
Reason to fret?
One reason for buying these companies is that they are like the catch phrase for those crappy rotisserie ovens sold on late night commercials: Just set it -- to dividend reinvestment -- and forget it. When oil prices plummet, though, too many people get skittish about investing in energy.
If anything might help make this situation any better, know this: During other massive collapses in oil prices -- such as in 2008 when Brent crude fell 75% in six months, or when when oil dropped over 56% between 1997 and 1998, or even from 1980-1985 when oil prices slowly tumbled close to 70% -- both ExxonMobil and Chevron have either maintained or grown their dividends. Royal Dutch Shell and BP would be right there with them were it not for some restructuring at Shell or the Deepwater Horizon accident at BP.
These companies have been though a lot, yet they have worked their way through these issues without compromising too much value for shareholders. If that doesn't help you sleep better at night I don't know what will.
Time to buy?
The overall investment thesis for these companies does not seem to have changed too much over time, but with such a price drop it's likely that their valuations have changed for the better. For more opportunistic investors, let's look at the numbers.
|Current valuation||Total Enterprise Value/Revenue||Total Enterprise Value/EBITDA||Price/Earnings||Price/Tangible Book Value|
|Royal Dutch Shell||0.51x||4.07x||12.48x||1.16x|
These numbers can be hard to parse because one company can be cheaper based on its sales, while another's assets on the books are held in lower regard. Rather than choosing based on which is cheaper than the others, let's look at their 10-year median valuations for an apples-to-apples comparison of each company.
|10-year Median Valuation||Total Enterprise Value/Revenue||Total Enterprise Value/EBITDA||Price/Earnings||Price/ Tangible Book Value|
|Royal Dutch Shell||0.60x||4.07x||8.60x||1.43x|
It looks as though ExxonMobil alone is considered undervalued by a historical perspective across all metrics, which is a little surprising considering that its shares have suffered the least in recent months.
What a Fool believes
The price of oil will obviously impact the bottom line for all of these companies, but based on their respective weights toward production and their production mix, it appears Chevron has the highest exposure to price swings right now. However, if history is any lesson, oil at today's prices won't severely compromise any of these companies in the long run.
For anyone looking to buy in this sector today, I'm going to stick to my guns from last time and pick ExxonMobil yet again. Based on its valuation today compared to its historical valuation, it looks like the cheapest of the bunch. However, if the other oil giants continue to slide as quickly as they have in recent months, it might be worth reconsidering another one of these companies soon.