Oil & Gas: 3 Competing World Stocks
Damian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the last decade, oil and gas companies have been associated with war. Despite the moral questionings that arise in relation to the Iraq and Afghanistan occupations, these are very profitable businesses that deserve investors´attention. Let us look at one company closely associated with the US government, ExxonMobil (NYSE: XOM), and two foreign competitors, Petrobras (NYSE: PBR) and PetroChina (NYSE: PTR).
Although a few might remember the Exxon Valdez incident, the company has come a long way since. In 1999 it merged with Mobil, and today ExxonMobil is the world's largest publicly traded company. The new firm was one of the first to exploit oil in post-Hussein Iraq, and has shown a great deal of concern about keeping shareholders happy. For instance, over the last 10 years, shareholders have seen dividends double ($2.18,) and EPS increase by an average of 13% each year.
Structurally, ExxonMobil boasts an increase of 29% on investment projects, financed in great part with the free cash generated. Further, the company has diversified operations and today is present in North America, West Africa, Oceania, Asia, and the Middle East. This global reach allowed the firm to execute a buy back scheme, and raise yield to 2.80%.
On the downside, ExxonMobil has shown weakness because production volumes do not grow steadily. The market has become ever more competitive; and countries more zealous about natural resources. Hence, the company has entered politically unstable countries in an attempt to maintain growth, raising considerably associated risks. Iraq and West Africa are the most representative examples.
In all, ExxonMobil trades at 11 times EPS consensus estimates, remaining undervalued in relation to its industry´s and the S&P 500´s averages. It is recommended to BUY and enjoy of a sure long-term investment, since oil prices should remain high for a while yet.
Made in China
PetroChina is the strongest market contender for ExxonMobil. By far the largest oil and gas producer, the firm has been on an acquisition rampage in Australia and Canada. More specifically, the company is looking to expand its gas business; a branch that has been particularly problematic for ExxonMobil due to profitability issues. For the Chinese giant, the gas business has not been easy either, but investment has been done in less troubled areas.
Aided by a monumental Chinese economic growth during the last decade, PetroChina has expanded its customer base. The successful base created inland helped making the first international ventures possible. Additionally, in 2009 the Chinese government gave the firm an important loan to complete foreign acquisitions. Here, the point to highlight is that future developments have been settled in politically stable regions in comparison with ExxonMobil.
At home, however, PetroChina has to wrestle with tight government regulation. Hence, the firm enjoys a great potential for new customers, but authorities regulate prices, limiting revenues. Nevertheless, the company will be able to expand to the coast from its settled inland base. So its market share will increase, but revenues may not be exorbitant.
Last, PetroChina has posted the greatest growth in the industry in the last 3 years. However, net growth and operating margins are well below industry averages. So given the stock is trading at almost a 40% premium, it is recommended to HOLD until its gas investment becomes profitable and some action is taken to control its rising debt.
Protests and isolation
Petrobras is the leading South American oil company. It is not associated to a socialist regime, and has pulled out of Argentina when the time called for such a move. Also, issuing $11 billion in debt while taking some advantage of the Brazilian economy will put managements' skills to the test. Moreover, new oilfields were found around the Brazilian coast over the last few years, providing great exposure to deepwater oil.
The catalysts for Petrobras are the upcoming sports events to be hosted by Brazil. Demand for oil-refined products will increase, putting pressure on the company to deliver and meet world expectations. Recently taken debt should be thought in this context also, and not as a worrying sign. Debt is an issue that management has taken note of, and presented a plan to reduce its impact via cost cuts. Also, Petrobras reduced international exposure by leaving the Argentine market and isolating itself to the Brazilian market. The decision helped the company to meet domestic diesel demand and increase cash inflow.
In the end, Petrobras is trading with a 50% premium, even though prices have been declining steadily since 2009. Petrobras remains a risky investment, especially taking into account recent protests. It is recommended to HOLD until the company sets finances back on the right track, and social unrest settles down.
Petrobras is financially unhealthy at this point, and Brazil is suffering from increasing social disorder. On the other hand, PetroChina is better financially, has diversified risks, but the share price premium remains too high. So ExxonMobil is the best buy due to a lower premium, generation of a wide economic moat, and nearly spotless financials.
Damian Illia has no position in any stocks mentioned. The Motley Fool recommends Petroleo Brasileiro S.A. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!