Which Oil Bargains Can Make You Really Rich?

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Currently, a tendency to spin off operations and become focused on a few business areas is perceived to provide more value for all investors involved. For instance, Marathon Oil (NYSE: MRO) and Marathon Petroleum were allocated from the Marathon Group. ConocoPhillips (NYSE: COP) divided its company into Phillips66 (NYSE: PSX), which manages downstream operations, while exploration and production continue to be handled by ConocoPhillips itself. Occidental Petroleum (NYSE: OXY) has also been considering the idea of a spinoff as well. I have added this company into the assessment in order to provide readers with a clearer picture of how the spinoffs for Marathon and ConocoPhillips might be beneficial.

Recent updates

After spinning off Phillips66, ConocoPhillips has been engaged in a major capital reshuffle in geographic and administrative terms. This company reported slightly lower oil and natural gas production in 1Q13 compared to the same period in 2012, while profit dropped from $2.9 billion to $2.1 billion. Seeing unfavorable gas prices, the company has arranged its production mix in the Americas, with shift from natural gas to liquids, from 45% to 51%. ConocoPhillips also plans to generate $8.2 billion by selling off assets in Algeria, Nigeria, and Kazakhstan.

Marathon Oil reported a profit of $383 million in 1Q13, when compared to $417 million in 1Q12. The 8% drop in profits comes at a time when production increased by 19%. However, the increase in production could not be translated into revenue growth because of weaker prices of crude oil. Marathon’s increase in production was supported by strong growth in the Eagle Ford and Bakken shale plays.

Occidental Petroleum had been rumored to be following the same spinoff path, but its CEO broke the news that, while the company did assess the option of spinning off, it is not currently the best idea for shareholders. For Marathon and ConocoPhillips, however, this was undoubtedly a beneficial solution.

Competition

ConocoPhillips offers the highest dividend yield, making the company a favorite for investors at first sight. It is also the most undervalued of the three, while being consistent with its income. The company’s revenue stream has shown a negative trend over the past three years, but we should keep in mind the reason for that (weak commodity prices and the recent spinoff of Phillips66).

Occidental Petroleum is a strong oil/ gas producer, but ConocoPhillips looks impressive with its ROE and depressed P/E rating. 

<table> <thead> <tr><th> <p><strong>Indicator</strong></p> </th><th> <p><a href="http://www.bloomberg.com/quote/MRO:US"><strong>Marathon Oil</strong></a></p> </th><th> <p><a href="http://quotes.morningstar.com/stock/cop/s?t=COP"><strong>ConocoPhillips</strong></a></p> </th><th> <p><a href="http://quotes.morningstar.com/stock/oxy/s?t=OXY"><strong>Occidental Petroleum </strong></a></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Price/Earnings ttm</strong></p> </td> <td> <p>16.1</p> </td> <td> <p>10.4</p> </td> <td> <p>16.8</p> </td> </tr> <tr> <td> <p><strong>Price/Book</strong></p> </td> <td> <p>1.3</p> </td> <td> <p>1.5</p> </td> <td> <p>1.8</p> </td> </tr> <tr> <td> <p><strong>Net Income Growth (3 Yr Avg.)</strong></p> </td> <td> <p>2.6</p> </td> <td> <p>24.1</p> </td> <td> <p>16.4</p> </td> </tr> <tr> <td> <p><strong>Revenue Growth (3 Yr Avg.)</strong></p> </td> <td> <p>-33.0</p> </td> <td> <p>-25.9</p> </td> <td> <p>17.5</p> </td> </tr> <tr> <td> <p><strong>Dividend Yield</strong><strong>, %</strong></p> </td> <td> <p>1.94%</p> </td> <td> <p>4.26%</p> </td> <td> <p>2.55%</p> </td> </tr> <tr> <td> <p><strong>Debt/Equity</strong></p> </td> <td> <p>0.3</p> </td> <td> <p>0.4</p> </td> <td> <p>0.2</p> </td> </tr> <tr> <td> <p><strong>ROE tttm</strong></p> </td> <td> <p>8.6</p> </td> <td> <p>13.2</p> </td> <td> <p>11.0</p> </td> </tr> <tr> <td> <p><strong>Current Price</strong></p> </td> <td> <p><strong>$34.</strong><strong>99</strong></p> </td> <td> <p><strong>$</strong><strong>61.94</strong></p> </td> <td> <p><strong>$</strong><strong>92.61</strong></p> </td> </tr> </tbody> </table>

Data taken from Morningstar and Financial Visualizations on June 18, 2013

ConocoPhillips is a clear winner in this selection in terms of financial health and dividend policy. The company’s payout ratio of 44.7% looks juicy. The dividend paid is $2.64 per share annually.

Which oil stock is the best bet for your portfolio?

Occidental Petroleum is stuck in a catch-22 situation – if it spins off, it is worse off. If it doesn't, it's still worse off since Phillips66 and Marathon Petroleum have been two of the best-performing stocks on the market due to their renewed focus on core production capabilities. This picture might draw investors away from Occidental Petroleum for a long time.

Moving forward, Marathon Oil and ConocoPhillips have a unique chance to focus only on their core capabilities and benefit much from that. Based on international commodity prices, the two companies continue to earn significant profits from their broad bases. Marathon Oil’s share price has appreciated approximately 50% since its low in June, but based on its weak financials (compared to ConocoPhillips), I believe investors will be better off investing in ConocoPhillips.

ConocoPhillips’ strong dividend and consistent earnings also beat Occidental Petroleum’s because Occidental Petroleum is going through both a power struggle and a growth period, which has been exacerbated by the emergence of both Phillips66 and Marathon Oil.

Bottom line

ConocoPhillips’ profits dropped by 27% in 1Q13 due to the transition of splitting and the weak international commodity price trend. However, all these events were expected, and the final results were better than the expectations. I expect ConocoPhillips’ share price to grow considerably over the next two years as new projects come online, causing a price appreciation. Investors should consider buying ConocoPhillips for the long run.

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Marina Avilkina has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

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