With oil prices undergoing one of their biggest routs in decades – falling some 53.59% from a one-year high of $107.73 at the end of June of 2014 to close at $50 right on the button yesterday – everyone and their dog have been rummaging through the charred remains of oil companies and staking their claims on which will rise out of the ashes first.
One of the largest investment banks in the world, Goldman Sachs (NYSE: GS), has recently announced its favourite pick from among the 3 largest U.S. oil companies – Exxon Mobile (NYSE: XOM), Chevron (NYSE: CVX), and ConocoPhillips (NYSE: COP).
Pitting America’s three largest oil companies against one another reminds me of that scene near the end of the movie “The Good, The Bad, and The Ugly”, where Clint Eastwood, Eli Wallach and Lee Van Cleef are standing in a circle in the cemetery, each drawing their guns on one another. Who shoots whom first? Who survives?
Let’s first find out whom Goldman Sachs picked as the winner, after which we’ll run a comparison of our own to see if the bank got it right.
Goldman Sachs’ Top U.S. Oil Pick
“Analysts rated Exxon Mobil Corp stock a buy, preferring it to Chevron Corp and ConocoPhillips,” MarketWatch reported Goldman Sachs’ verdict.
What was the investment bank’s reasoning? “Because of Exxon’s ‘solid’ ability to generate free cash flow, its dividend growth, and improving refining margins,” MarketWatch answers.
Goldman Sachs’ analysts consider a large stash of cash as critical in the early stage of a recovery after a major sector rout, since a whole slew of postponed projects will be given the green light after a long period of inactivity. And the more cash a company has, the faster it can ramp up its production and get started on those new projects.
GS’s analysts also expect Exxon to use some of its cash to “raise its dividend by 6% each year, on average, through 2017, and buy back about $1 billion worth of shares each quarter,” Goldman informed MarketWatch. That bodes well for Exxon’s stock, making it a must have addition to any portfolio, in the bank’s opinion.
Chevron, for its part, is expected to increase its oil production as well when its new projects in Angola and Australia are finally completed over the next two years. However, Chevron needs an oil price above $80 just to sustain its dividend which is currently the second highest of the three companies at 4.10%.
By comparison, “Exxon is a better bet for investors seeking to reduce risk and stay invested in energy, given a lower cash flow breakeven and risk profile,” Goldman informed. “We also note investors are more underweight [in Exxon shares] than [Chevron shares],” which means there should be a rush to buy Exxon as soon as the oil price shows signs of recovering, giving XOM a stronger upside momentum than CVX.
What about ConocoPhillips? COP, “for its turn, offers ‘attractive’ dividends and has responded ‘swiftly and effectively’ to lower crude prices,” Goldman Sachs informed MarketWatch. “ConocoPhillips has tweaked its capital expenditure plan twice since December, cutting it by 30% to $11.5 billion… [and] would benefit the most if oil prices were to recover faster than Wall Street expects, as it is able to ramp up production quickly.”
Despite Conoco’s agility, Exxon’s superior cash flows trump Chevron’s upcoming project completions and Conoco’s cost cutting. For that reason, then, Goldman Sachs’ analysts rate Exxon a buy, while rating Chevron and ConocoPhillips as neutral.
But in my comparison of the companies’ financial stats, I came up with a slightly different outcome.
Showdown in the Oil Patch
I examined 13 different categories of data and ranked each of the three companies in order from best to worst, crediting the winner of each metric with a point (highlighted in green in the table below), and docking the loser of each metric by a point (highlighted in yellow in the table below). I then tabulated all the wins and all the losses to produce each company’s final score.
It was a very close gunfight, one of those showdowns where you hear all three pistols firing, and then have to wait for the smoke to clear before seeing which shooter is left standing. Here’s how it went by category:
• Stock price ratios: Chevron won all three metrics in this category, given its lowest stock price to forward earnings, company book value, and 5-year PEG.
• Cash: Chevron won again given its highest cash balance relative to market cap.
• Debt and Current Ratio: Exxon won the debt metric given its lowest debt relative to market cap. Chevron won the current ratio metric for having the highest ability to repay its debts.
• Revenue: Exxon scores a point for having the highest trailing 12 month revenues relative to market cap, while Conoco finally scores a point for having the highest trailing quarterly revenue growth.
• Margins: Conoco then scores two more points for having the widest profit and operating margins.
• Returns: For returns on assets and on equity, Exxon scores two more points.
• EBITDA: Conoco takes this category with wins for highest EBITDA as percentages of market cap and revenue.
• Diluted Earnings Per Share: Chevron wins this one for having the highest DEPS percentage over its current stock price, representing the best DEPS value for the amount of money invested.
• Future Earnings Per Share over current stock price: Exxon scored 3 points here, while Chevron scored one point.
• Future earnings growth rate: Here again, Exxon scored the most points for the highest earnings growth rate over the near term, while Conoco scored two points for the highest growth rate over the longer term.
• Dividend yield: Conoco scored a point for having the highest dividend yield currently.
• Analyst price targets: Exxon’s stock is projected to have the highest price target as a percentage of its current stock price, where Conoco is seen having the best mean and low price targets relative to its current stock price.
• Analyst recommendations: For having the most strong buy and buy recommendations as a percentage of overall recommendations, Conoco scores two more points. Recommendations for hold, underperform and sell are not ranked since these come as a consequence of buy and strong buy rankings.
So there we have it, all three companies ranked according to 13 financial categories comprised of 33 metrics (though one was not ranked since one piece of data was “Not Available”). What’s the final tally?
Chevron scores the most points, with 7 first place finishes and 5 last place finishes, netting it a final score of +2. ConocoPhillips comes in second place with 12 first place finishes and 13 last place finishes for a net score of -1. Followed by Exxon Mobile with 11 first places and 13 last places for a score of -2.
After the smoke has cleared, this comparison finds Chevron to be the sole gunfighter left standing, with Exxon Mobile mortally wounded. Exxon is in fact the worst positioned of the three companies, which flies right in the face of Goldman Sachs’ analysis which ranks XOM first. Goldman Sachs, eat your heart out.
Data Source: Yahoo! Finance