Big Oil Exxon Mobil, Chevron, BP, and Total are Cheap
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“So long as oil is used as a source of energy, when the energy cost of recovering a barrel of oil becomes greater than the energy content of the oil, production will cease no matter what the monetary price may be.” – Dr. M. King Hubbert
The depletion of oil reserves is a serious global energy problem. Oil is a crucial resource and as it is depleted the remaining oil requires more energy to extract. According to the US Department of Energy, the energy return on energy invested (EROI = Total Energy Acquired / Energy Expended) of conventional petroleum is currently 10.5. This number used to be at least 20. In addition, unconventional oil like Alberta oil sands ranges from 5.0 to 7.2.
Eventually, the amount of energy needed to retrieve oil will exceed the amount of energy in the oil retrieved. At this point, oil exploration (for an energy source) becomes completely pointless because there is a net loss in energy. This will mean the death of the oil exploration industry.
However, the inevitable demise of the oil industry should not deter potential investors. First of all, it is unknown how much oil is still left in the ground. According to BP’s (NYSE: BP) Statistical Review of World Energy, in 2011, world proved oil reserves reached 1.652 trillion barrels. Based on 2011 numbers, this is equivalent to 54.2 years of global consumption.
In addition, technology is a huge factor. Advances in technology have provided access to oil that was previously considered unrecoverable. For example, fracking and deeper offshore oil drilling have boosted proven oil reserves by billions of barrels. In 2011, Canadian oil sands accounted for 169.2 billion barrels of proved reserves.
Moreover, more efficient ways of energy consumption are emerging. For example, Google (NASDAQ: GOOG) is working on autonomous cars. An autonomous car means that the car is capable of driving itself. This revolutionary technology has the potential to drastically reduce traffic congestion and eliminate the wasted energy associated with it. Google’s driverless cars have already driven over 300,000 miles.
Due to their size, oil giants Chevron (NYSE: CVX), Exxon Mobil (NYSE: XOM), Total SA (NYSE: TOT), and BP have strong advantages. As the following table shows, these companies have huge proven oil reserves.
|Chevron||Reserve||2011 Production Rate (Per Day)||Reserve Life (Years)|
|Liquids (Million Barrels)||6,455||1.849||9.56|
|Nat Gas (Billion Cubic Ft)||28,683||4.941||15.90|
|Exxon Mobil||Reserve||2011 Production Rate (Per Day)||Reserve Life (Years)|
|Liquids (Million Barrels)||12,228||2.312||14.49|
|Nat Gas (Billion Cubic Ft)||76,222||13.16||15.87|
|Total SA||Reserve||2011 Production Rate (Per Day)||Reserve Life (Years)|
|Liquids (Million Barrels)||5,784||1.226||12.93|
|Nat Gas (Billion Cubic Ft)||30,717||6.098||13.80|
|BP||Reserve||2011 Production Rate (Per Day)||Reserve Life (Years)|
|Liquids (Million Barrels)||10,565||2.157||13.42|
|Nat Gas (Billion Cubic Ft)||41,659||7.518||15.18|
Furthermore, due to a number of factors such as oil price and government regulations, these companies have oil reserves that do not qualify as proven. As a result, their reserve lives are probably much longer than the numbers listed.
In addition, these companies have PE ratios less than their reserve lives. Chevron, Exxon Mobil, Total SA, and BP have (at the time of this writing) PE ratios of 8.35, 9.20, 8.26, and 7.81, respectively. PE represents the number of years it would take for a company to earn its current stock price. For instance, assuming steady earnings and stock price, Chevron will take 8.35 years to accumulate $112.16 per share of earnings. Since Chevron has 9.56 and 15.90 years of proved liquids and natural gas reserves, respectively, the company should be able to easily payback investors the cost of their original investments. This is true for all four companies.
This does not even take into account the companies' book values. Chevron, Exxon Mobil, Total SA, and BP have tangible book values of $63.89, $35.27, $32.49, and $24.61 per share, respectively. When tangible book value is taken into account, it is clear that these companies are severely under priced.
The only major knock is against BP. BP is still dealing with costs due to the Macondo well incident. BP has settled claims with businesses and individuals at a total cost of $7.8 billion. However, fines and total clean up costs could amount to over $65 billion (Reuters). Thus, BP is the riskiest investment out of the four. However, it does have a low PE and long reserve lives.
One final factor to consider is the cost of oil production. As oil becomes increasingly scarce, production and exploration costs will go up. For example, Shell has invested $4.5 billion to drill in Arctic waters. This is before Shell has even drilled a single exploratory well (CNN). However, the growing scarcity of oil is a double edged sword. While production costs will continue to go up, the price of oil will also inevitably increase. It is the basics of supply and demand. For the foreseeable future, demand will continue to increase and supply will continue to decrease. As a result, the price of oil will increase and boost profits. As an added bonus, an increase in oil price will increase the amount of oil that is economically recoverable.
In summary, many oil companies are under-priced. While peak oil is inevitable, it should not deter investors. Currently, the world proved reserve life of oil is around 54 years and there are many factors that could extend that. Technology advancements can provide access to previously unrecoverable oil and increase consumption efficiency. In addition, increases in oil price can make development of expensive oil fields profitable. Thus, big oil companies make great investments. They have the capital to develop expensive oil fields and have huge reserves. Chevron, Exxon Mobil, Total SA, and BP are worth a long look.
iamgreatness has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and ExxonMobil. Motley Fool newsletter services recommend Chevron, Google, and Total SA. (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.If you have questions about this post or the Fool’s blog network, click here for information.