A Financial Salute to America: Part I - Black Gold
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In honor of it being the week of July 4, I thought I’d take a historical and financial look at what makes America the greatest country on Earth. After all, we’re the biggest economy on the planet, we export American culture around the world, and our companies set industry standards. Hey, we even created them.
A brief history of Standard Oil
In the early 20th century, no commodity represented the power of American business quite like oil, and no company personified the promise and the wealth of America like Rockefeller’s Standard Oil. Dominating the world of crude for four decades, it was the pioneering producer of the liquid, and thanks to great business management, horizontally and vertically, by J.D. Rockefeller, oil was made affordable for millions of people worldwide, giving rise to the motorcar and plastics industry decades later. It can be said that if it weren’t for Standard Oil, oil wouldn’t be as important to the world economy as it is today.
Sadly in 1911, it was victim to the controversial Sherman Antitrust Act and was broken up into dozens of smaller companies by government order. Some of the companies that came from the break-up though are still with us, such as ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX), each company owning the rights to the Standard name in some part of the country. These three are thriving companies, and continue to innovate and play in the big-money world of oil.
ExxonMobil goes north for oil…
Even though it got its start as one of the bigger “baby Standard” companies, ExxonMobil is not content with just being an oil company, and in the past decade has looked to tap in to the geothermal and natural gas industries, areas in which the U.S. can excel in thanks to geography. In fact, the company’s slogan “Taking on the world’s toughest energy challenges” is a testament to Exxon’s quest of staying on top of the energy industry.
According to the company’s 1Q earnings reports, despite a $450 million drop off in earnings from the last quarter to $9.5 billion. This is still a healthy earnings report in monetary terms, overcoming a slowdown in Chinese demand, but the real focus of the report was to announce numerous global deals that Exxon is either completing or getting into, specifically in Russia.
Exxon has teamed up with Russia’s largest oil company, Rosneft, to develop refineries and research oil fields in the Black and Kara Seas and the Arctic Circle, as well as an Arctic Research Center in Siberia, focused on environmentally safe oil exploration. For the sea-based projects, Exxon will supply nearly $3 billion for a 33% interest stake. The reason for the funding is that these oil fields, according to company spokespeople, is largely untapped, and by having first-mover access to these fields, Exxon stands to gain big time. With Russia increasing production to 10.48 million barrels per day last month, or 12% of the world’s supply, along with increased demand from Russia’s growing middle class, there is a window of opportunity for private foreign companies to profit from new found oil fields. If Exxon thinks $3 billion is a good investment, then the potential for profit must be large, and being an American company, it means a greater footprint for American business in a still-new market for non-Russian investors.
…While Chevron goes south for natural gas
The other biggest “baby Standard," Chevron, also put up impressive first quarter earnings and is also expanding operations in other parts of the world as well. Its $6.2 billion in income meant there was a $300 million drop year-over-year, a similar drop to Exxon, but still an indicator of strength for the company’s bottom line. Despite the drop-off in income, possibly tied to the decrease in crude oil prices from 2012, Chevron churned out 2.65 million barrels per day, 20,000 more than the first quarter of 2012, as well as investing $8.9 billion in capital expenditures and investment, up $2.5 billion year-over-year.
Chevron is also growing its global footprint like Exxon. In Angola, the first cargo load of liquefied natural gas (LNG) went out from Chevron subsidy Cabinda Gulf Oil Company. This comes from a competitive natural gas area, since Exxon also has representation here, but Cabinda’s site is capable, at full capacity, of churning out 63,000 barrels/day of LNE, and 5.2 million metric tons per year, valued at roughly $130 million/year on that site alone, although Chevron only has a 36% stake in the land. It is still a good haul for natural gas, and with increasing worldwide demand for natural gas as an alternative to oil, Chevron may be well positioned for the future of natural gas with access to this site, even though natural gas isn’t as lucrative as oil.
Both great, but one a little more so
Both companies are solid investments, with low forward P/E, high dividend yields (over 2.8% annually), and solid E/P ratios of over 10%, but Chevron is the better buy. It has a 3.4% dividend yield now that the quarterly payment will be $1 per share for the first time ever, which is pretty high by market standards. Also, it has a stronger profit margin at 11.9% with earnings per share at $13.23, all higher than Exxon. Its positions in natural gas also make this company a good stock for the long haul, as natural gas grows in demand and hopefully enjoys price increases.
Standard Oil may be long gone, but its babies are still roaming the forests and foothills of the Earth, searching like Rockefeller for the next big market.
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