ExxonMobil or Integrated Oils: Which for Better Gains?
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ExxonMobil (NYSE: XOM) remains the country's largest corporation both by revenue and by profit. Its heft also dwarfs its nearest energy competitor, Chevron (CVX), by nearly doubling that company's revenues. But the energy industry in general is in somewhat of a transition from the past into a future where environmental and health concerns, as well as cost, make alternate energy sources too attractive to ignore. The biggest winners of all will be those companies that can embrace both the old petroleum based energy economy, and the new energy economy more or less simultaneously.
ExxonMobil had a somewhat disappointing second quarter and first half of 2012. Second quarter earnings came to $15.9 billion, or $3.41 per share, up roughly 50% from the $10.68 billion, or $2.18 per share. But $7.5 billion of that was due to gains from divestments and restructurings, the largest of which was the spin-off of a part of ExxonMobil's holdings in Japan. Take away the benefits of those transactions, and earnings came to $8.4 billion, a 22% fall from last year's second quarter.
Behind the gross numbers were things that were even more concerning to me. Upstream domestic profits have now declined five consecutive quarters, and in the second quarter came to $678 million, less than half the $1.45 billion of the second quarter of 2011. This is in an era of renewed domestic oil discovery due to new drilling techniques. Overseas upstream profits were $7.7 billion; about ten percent above the year ago amount. Downstream comparisons made little sense as the one time benefits from asset sales were categorized as downstream.
The macro view of oil prices is that it is a finite commodity of which supplies will be under ever increasing pressure, especially as economies of India, China and Indonesia recover. All the truly “easy” oil is long gone, and remaining supplies are in areas sensitive environmentally such as in Alaska, deep in the oceans such as off shore Brazil, or generally difficult, such as the Canadian Oil Sands.
ExxonMobil's balance sheet was healthy when oil was selling in the 30s 25 years ago. It is no less healthy today as the company has over $18 billion in cash on its balance sheet. It has ongoing share repurchase plans, under which $5 billion in shares were repurchased in the second quarter, and a decent 2.6% yield.
But all is not well. ExxonMobil has not made any serious economic commitment to any kind of clean energy source other than its $600 million investment in algae. And on the other side of the equation, it is responsible for a continued fouling of coastal Nigeria, currently in the form of a 15 mile wide oil slick. Exxon's financial reports also indicate a slowing in its recovered oil and gas assets. Oil recovered in the second quarter was six percent below the same quarter of last year, and gas production was off 5.5%.
If you believe, as I do, that the trend of oil prices is generally going to be higher, ExxonMobil has a bright future for investors. If you believe that the efforts to convert away from fossil fuels and toward cleaner and renewable energy sources will be successful, you would be better off investing in companies devoted toward those sorts of industries. Over the next twelve months, I really do not see ExxonMobil outperforming the broader market in any meaningful way.
A much smaller integrated oil and gas company that looks good to me right now is Suncor Energy (NYSE: SU). This Canadian company gets the bulk of its revenues and profits from Canadian oil sand properties, though it also has interests in Africa and the Middle East, as well as refining and marketing arms.
Suncor beat analysts' profit expectations each of the last four quarters, and its new Chief Executive, Steve Williams, recently stated his interest is in profitability, not in revenue growth for its own sake. That is definitely an indication that the company will not be chasing the huge growth some of its competitors are counting on in oil sands development. That is a tremendous sign for investors in the company, and that alone makes me a fan of Suncor. Suncor also opened two wind turbine projects in the second quarter, bringing its overall renewable energy portfolio to 102 gigawatt hours.
Suncor has raised its dividend annually since 2005, and has authorized $1 billion in share buybacks in 2012. It has steadily whittled its long term debt down from over $13 billion in 2009 to about $10 billion at the end of the second quarter, where it comprised just 21% of capital.
Analysts have a 12 month price target of $41 per share, a 30% premium from the price (between $31 and $32 per share) as I write this. As good as that seems, with its balanced upstream and downstream assets, this is a company I see being a real winner over the longer run.
Another quality, but often overlooked integrated oil and gas play is Murphy Oil (NYSE: MUR). This Arkansas based company sports a balance sheet with virtually no long term debt, and has been a steady performer. In the second quarter of 2012, after excluding divested assets, the company earned $295 million, or $1.52 per share, a six percent gain from the $280 million, or $1.44 per share of the second quarter of 2011. Murphy is a leading ethanol producer, so it is at some risk of losing tax subsidies going forward. Yet, recent discoveries in West Africa and Southeast Asia are where the company's growth is going to come, and I believe there will be plenty of that growth.
Murphy is selling at a five year PEG of 1.15, and a price to tangible book value of 1.07. I do not see it appreciably outperforming the market in the next twelve months, but over the longer run Murphy can be a real winning holding.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. 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.