Big Oil May Have Some Energy

10/11/2010


British oil giant BP ($41; BP) has lost 29% of its stock-market value since the start of the year and 49% over the last three years.

While an environmental disaster in the Gulf of Mexico explains BP’s weakness, it cannot account for the underperformance of the energy sector as a whole. The S&P 1500 Energy Sector Index, which contains only U.S. companies, is flat so far this year versus a 5% gain in the broader S&P 1500 Index.

Since the end of 2008, the energy sector has gained 14%, while the S&P 1500 has risen 30%. Of course, the sector has outperformed by a wide margin over the last decade.


BIG OIL, BIG INFLUENCE

Seven U.S.-traded oil companies, including five foreign firms, boast a stock-market value of more than $100 billion. The five largest energy companies in the U.S. combine to account for nearly $700 billion in market capitalization, about 58% of the total capitalization of all 81 energy stocks in the S&P 1500 Index. Those giants exert outsize influence on the energy sector index, which accounts for 10% of the broader S&P 1500 Index’s value.


The world’s four largest publicly-traded oil companies — Exxon Mobil ($63; XOM), Chevron ($83; CVX), BP, and Royal Dutch Shell ($62; RDSa) — combined to lose 8% of their market value so far this year and 39% over the last three years.

In the wake of that poor performance, energy stocks are looking more attractive — at least the big ones. While the average S&P 1500 energy stock earns a lower Quadrix® Overall and Value score today than it did a year ago, the opposite is true for the largest companies.

BP’s Quadrix Overall score has been nearly as volatile as its stock. The Overall score was 43 at the start of the year, then rose above 90 before plummeting after the April 20 oil-rig explosion. BP now earns an Overall score of 60 and a Value score of 92. At 6.5 times trailing earnings and 4.3 times operating cash flow, BP trades at a deep discount to both its largest peers and its historical norms.

BP permanently plugged the damaged well in mid-September. BP was financially strong before the disaster. A $20 billion escrow fund for damage claims, coupled with a dividend suspension, went a long way toward easing investors’ concerns about solvency and calming the political storm. The shares have risen 55% from June lows but remain 32% down from April highs. So far, BP has spent $11.2 billion to deal with the oil leak, and estimates of its ultimate liability range from less than $20 billion to more than $60 billion.

While the true scope of that liability may not be known for years, in September incoming CEO Robert Dudley said BP was fundamentally sound and hoped to reinstate is dividend in the March quarter. BP is less risky today than it was a couple months ago, but its prospects are still too uncertain for new buying. The stock is rated B (average).


Chevron, the second-largest U.S. oil company, managed sales growth of at least 30% and per-share-profit growth of at least 150% in the March and June quarters. Higher oil and natural-gas prices and a sharp rise in refining margins accounted for most of the growth. Energy production rose 3% in the June quarter, and growth should continue as large projects keep ramping up.

Despite the recession, Chevron managed to boost its cash position by $6 billion while reducing total debt by $1.6 billion over the last year — without a dividend cut or share offering. In October, the company said it plans to start buying back at least $500 million of its own shares each quarter. Operating cash flow jumped 45% in the 12 months ended June. Chevron, yielding 3.5% and earning scores of at least 96 in Quadrix Overall and our two sector-specific ranks, is rated A (above average).

SECTOR ANALYSIS
—– P/E Ratio –—
– Total Return –
Quadrix
Value
— Score * —
Quadrix
Overall
— Score * —
Company (Price; Ticker)
Trailing
Trailing
Over 5-
Yr. Avg.
YTD
(%)
5 Yrs.
(Annual.)
(%)
Curr.
Jan. 1
Curr.
Jan. 1
BP ($41; BP)
7
0.67
-28
-5
92
64
60
43
Chevron
($83; CVX)
10
1.07
11
10
88
72
96
58
Exxon Mobil
($63; XOM)
12
1.04
-5
4
81
59
75
46
Royal Dutch Shell
($62; RDSa)
13
1.32
8
5
77
63
84
47
Avg. For 20 Largest Energy Stocks
14
1
3
8
72
57
77
51
Avg. For S&P 1500
Energy Stocks
20
1.26
3
1
57
65
52
61
* Quadrix scores are percentile ranks, with 100 the best.

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