3 Picks From the Oil Industry
Wes is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The oil industry has plenty of players, from explorers to refiners to completely integrated companies. Below, we will take a look at one company from each of these categories and see where investors should put their money.
Schlumberger (NYSE: SLB) reported its second-quarter earnings just recently, and the results were great. In 2Q’13, the company posted revenue of $11.2 billion, up from $10.6 billion last quarter. This revenue expansion came from every segment Schlumberger operates in. Schlumberger also saw its margins expand.
It instituted a progressive dividend policy that should reward shareholders. And in addition to all of this, Schlumberger also authorized a $10 billion repurchase program with an option to increase it in the future.
Schlumberger uses its proprietary technology to get more oil out of the ground for less money and has attracted long-term business contracts. Schlumberger's new business ventures in Iraq and Venezuela should bring in stable revenue from depleted well extraction from at least three years before contract renewal periods are up. Schlumberger also made it clear on its conference call that Venezuela is holding up its end of the contract, and it expects it to be coming in smoothly in the future as well.
Schlumberger currently has a 21.5% gross margin and pays out only 25% of earnings to support a 1.5% dividend yield. The company has room to expand its payout, and given the outlined five year cash flow roadmap, it should continue to do so. CEO Paal Kibsgaard stated that he expects the price of crude oil to remain high, and this should drive more capital to be invested worldwide. He also noted that the company is also experiencing higher revenue per rig. Both of these statements indicate that the company will have growing and stable revenue into the future.
Phillips 66 (NYSE: PSX) is engaged in producing natural gas liquids and commodity petrochemicals from oil.
As we see American production of oil coming back, Phillips should benefit from the current disconnect between American gasoline prices and the world market prices. Americans are driving fewer miles per year, and the efficiency of vehicles sold in this country continues to increase. This has led to a drop in demand in the American market, making it more profitable to sell refined gasoline to other markets, most notably Europe. This may not give consumers relief at the pump, but it will give Phillips 66 a boost to earnings.
Phillips exports nearly 100,000 barrels of refined gasoline and diesel. This amount is predicted to double by 2014 and continue to increase. Phillips isn’t the only player in town when it comes to this type of exporting, the entire amount of gasoline exported from this country is set to double by early 2015.
Phillips 66 has a low profit margin, but more than makes up for it in volume. It has a very conservative payout ratio of 12.3% and now sports a $0.31 quarterly dividend, up from $0.20 when it was first spun off last year. Phillips 66 is expecting to continue raising the dividend to approximately 35% of earnings over the next five years, so there will be plenty of room to grow. The dividend of 2.1% would be near 6% if the company was to implement that policy today.
Soup to nuts vertical integration
ExxonMobil (NYSE: XOM) is vertically integrated as an energy company. In addition to its oil operations, the company is also investing heavily in natural gas and alternative fuels to gain expertise and remain relevant in the future.
The company has started to diversify itself more into downstream and chemical divisions. Exxon earned $9.5 billion in 1Q’13. $7 billion came from its traditional upstream oil and natural gas assets, $1.5 billion from downstream assets, and $1.1 billion from its chemical segment. This past quarter, Exxon secured more acreage off of the coast of China in addition to closing the Celtic acquisition. The Celtic acquisition will bring in an additional 600 acres of natural gas liquid shale, and help diversify Exxon’s business further.
Exxon has a gross margin of 35% compared to its peers at 13.7%. Exxon uses 23.2% of its earnings to support a dividend of 2.7%. This company has a history of growing its dividend over time and has a shareholder-friendly management.
Foolish bottom line
Schlumberger and Phillips 66 offer great exposure to a growing and a stable industry, both of which suit growth and income investors, respectively. However, Exxon provides the best of both worlds with the size and scale to take on larger projects.
Although Exxon might not provide stellar returns, the company offers stability and rewards for shareholders. Exxon has decreased its share count by over 10% since the beginning of 2011, and would probably continue to do so.
Wes Patoka 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!