Bit Oil Must Do It All

10/22/2012


Few companies balance more moving parts than integrated oil and gas majors. They straddle both sides of drilling and refining businesses, managing assets across the globe.

That diversification requires them to maneuver in 10,000 feet of water, deal with the capricious whims of foreign governments, and find new reserves to replenish what just got taken from the ground — all while looking beyond daily fluctuations in commodity prices that can cause sharp swings in share prices. These levers, calibrated correctly, can generate gobs of free cash flow, pumped out to investors in the form of dividends and stock buybacks.

At the Forecasts, we recommend two integrated oils, Chevron ($114; CVX) and Exxon Mobil ($92; XOM), both rated Buy and Long-Term Buy. Below, we look at three catalysts that could help drive Chevron, Exxon, and their peers in coming years.

• Spot prices for U.S. oil have slipped 6% since the end of 2011 but are still triple their December 2008 low. The spread between Brent crude (the price benchmark for Europe) and West Texas Intermediate crude (the most common U.S. benchmark) has averaged 5% since the start of 2007 and 17% since the start of 2011. Over the next few years, WTI's discount is expected to narrow as U.S. pipeline capacity increases. The Reuters oil poll projects per-barrel prices of $95 this year, $98 next year, and $101 in 2014 for U.S. crude. In contrast, the price of Brent crude is expected to dip below $104 per barrel in 2014.

• The U.S. ranked second in the world last year in natural-gas production, and production is expected to grow 4% in 2012. If not for unusually low prices, production would probably have grown more. Exxon leads a consortium seeking to take advantage of higher prices overseas by exporting natural gas from Alaska. The project, estimated to cost more than $65 billion, may take 10 years or more. The U.S. Energy Information Administration predicts natural-gas prices would rise 50% if the U.S. exported 9% to 18% of its production, but other studies project smaller increases.

• The EIA expects natural-gas consumption to outgrow oil consumption through 2035. With an eye to the future, Chevron has boosted its exposure to natural gas — 49% of its proved reserves in 2011, up from 45% in 2010. Chevron also invests in biofuels and advanced solar technologies. Exxon made a major bet on the North American natural-gas industry with its $24.66 billion acquisition of XTO in 2010. And earlier this month, Exxon agreed to pay $3.14 billion to acquire Canadian energy producer Celtic Exploration.


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