BOLTING LANDING, N.Y. (Stockpickr) -- With BP (BP) - Get Report in what seems like a constant news loop for many weeks now and on the heels of the earnings reports from the major integrated oil companies, I thought I would take a look at this industry in search of potential investments.
It is paramount to get a good understanding of this industry before we examine the individual stock candidates. So what do integrated oil and gas companies do? There are actually three main lines of business that these companies engage in:
: This is the exploration and production of oil and gas. In a general sense, this includes the exploration, appraisal, development and production of oil and gas. The revenue is derived from two factors: volume (quantity) and price. The more oil and gas that a company can produce from its wells, the more able the company is to meet global demand. Oil and gas prices, as with
, are dictated by market conditions. When it comes to oil and gas, not only is the supply/demand interaction of economics a major factor, but we also have to consider the impact of currencies on the global price of oil and gas.
: This is the refining of crude oil into end products such as gasoline, heating oil or jet fuel and the marketing of the end products of refining or natural gas. Since the upstream captures the benefits of exploration, extraction and sales, the downstream will earn the difference between upstream costs and the final price at which the companies will sell their refined product. In the downstream segment, these earnings are referred to as the crack spread.
: This segment includes several smaller aspects of the oil and gas industry, such as storage and transportation of crude oil and refined products as well as the production and sale of chemicals. The midstream tends to be the smallest of the oil and gas revenue streams and is included in the upstream segment for many companies.
So with that knowledge in mind, let's take a look at the four biggest global integrated oil and gas companies.
: Exxon, which pays a dividend of $1.76 a share, or 2.8%, reported second-quarter 2010 net earnings of $7.6 billion. The company attributed the $3.6 billion year-over-year increase to higher crude oil prices, upstream volume growth, improved downstream margins and strong chemical results. EPS, excluding special items, equated to $1.60, and total revenue was $92.5 billion, compared with expectations for $1.47 a share and revenue of $98.5 billion.
Across the board, the company showed improvement in all of its business streams. The Gulf oil-drilling moratorium is going to have a lesser impact on Exxon than it will on the oil service companies that I am reviewing below.
Exxon recently closed on its acquisition of XTO Energy, tripling Exxon's natural gas production and making the company the largest nat gas producer in the U.S. Exxon had $13 billion in cash and just over $20 billion of debt, including the $11.4 billion assumed from XTO. Since the closing of the XTO deal, Exxon has paid down $800 million of XTO commercial paper and bank loans and $2.5 billion of XTO long-term debt. The debt repayments will have a small negative impact on third-quarter results.
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: Chevron, which pays a dividend of $2.88 per share, or 3.6%, reported second-quarter 2010 net income of $5.4 billion, or $2.70 per share, with total revenue of $53 billion and sales of $51.1 billion. Expectations were for earnings of earn $2.44 per share on revenue of $52.5 billion.
While Chevron bettered analysts' consensus estimates, it is the manner in which it did so that concerns me. A great deal of the quarter's success can be attributed to low-quality factors such as forex gains and a lack of severance expenses, which were incurred in the first quarter. I was also disappointed with U.S. upstream results.
The company, miraculously and in contrast to the rest of the American corporate world, had a forex benefit of $241 million. This is a testament to the company's treasury management, a function which is quite complex for large multinational corporations, especially in a highly volatile currency and interest rate market. The Gulf drilling moratorium is expected to result in lost production of fewer than 10,000 barrels per day.
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: ConocoPhillips, which yields $2.20 per share, or 3.8%, reported second-quarter 2010 adjusted earnings of $2.5 billion, or $1.67 per share, an increase of $1.5 billion from the same quarter a year ago. No revenue figures were provided. Analysts were expecting earnings of $1.56 per share on revenue of $48 billion.
Conoco delivered an excellent quarter, with improvements in the upstream, midstream and downstream all contributing to improved results. During the quarter, the company completed $5.8 billion in asset sales and $3.5 billion in cash from operations. $2.7 billion of cash was used to retire debt during the quarter, and another $2.7 billion will be retired in August.
Conoco also announced that the company plans to sell all of its 20% ownership stake in Lukoil over the next 18 months. The after-tax stock sales of the entire 20% holding would equate to about $8.7 billion. The sale of its stake in Lukoil will further enable the company to pay down debt, repurchase shares and increase the dividend payout.
Who Owns ConocoPhillips?
: BP has suspended its dividend, which remains uncertain. Frankly, providing an analysis of the company's quarter would be a fruitless endeavor. The company is embroiled in its
, recently resulting in a change of leadership, with Robert Dudley assuming control from the sacked Tony Hayward. To recommend this company would be tantamount to blind speculation. The future of this company is uncertain. The liability of BP is potentially huge, with lawsuits weighing on the company for years.
With the exception of BP, these integrated oil and gas companies have very bright futures. Looking at the most-recent quarter, I was most impressed with ConocoPhillips. From the perspective of dividend payout and potential for future dividends, I also like Conoco the best. The company is in asset-sales mode, potentially setting itself up to purchase a major natural gas company;
could be potential targets.
As for Exxon, it has made a big investment in natural gas, which in the long run may separate that company from the pack -- it might take a few years to materialize. As I expect the U.S. to migrate more of its energy demand to natural gas, Exxon is sure to have a leg up on its competition.
I have a small legacy position in Chevron for two clients that own long-term, low-cost basis stock. Chevron is a great company, but I was disappointed in its most-recent quarter's results.
Finally, another way to play this industry is through ETFs, and
SPDR S&P Oil & Gas Exploration & Production
is a diversified portfolio of stocks in this industry. However, while this route gives you some diversification, you do not get the large dividend payouts from the three majors that I mentioned above.
-- Written by Scott Rothbort in Bolting Landing, N.Y.
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At the time of publication, Rothbort was long Chevron in two legacy accounts, although positions can change at any time.
Scott Rothbort has over 25 years of experience in the financial services industry. He is the Founder and President of
, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of
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. Rothbort is also a Term Professor of Finance at Seton Hall University's Stillman School of Business, where he teaches courses in finance and economics. He is the Chief Market Strategist for The Stillman School of Business and the co-supervisor of the Center for Securities Trading and Analysis.
Mr. Rothbort is a regular contributor to
TheStreet.com's RealMoney Silver
website and has frequently appeared as a professional guest on
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and local television. As an expert in the field of derivatives and exchange-traded funds (ETFs), he frequently speaks at industry conferences. He is an ETF advisory board member for the Information Management Network, a global organizer of institutional finance and investment conferences. In addition, he is widely quoted in interviews in the printed press and on the internet.
Mr. Rothbort founded LakeView Asset Management in 2002. Prior to that, since 1991, he worked at Merrill Lynch, where he held a wide variety of senior-level management positions, including Business Director for the Global Equity Derivative Department, Global Director for Equity Swaps Trading and Risk Management, and Director for secured funding and collateral management for the Global Capital Markets Group and Corporate Treasury. Prior to working at Merrill Lynch, within the financial services industry, he worked for County Nat West Securities and Morgan Stanley, where he had international assignments in Tokyo, Hong Kong and London. He began his career working at Price Waterhouse from 1982 to 1984.
Mr. Rothbort received an M.B.A., majoring in Finance and International Business from the Stern School of Business, New York University, in 1992, and a B.Sc. in Economics, majoring in Accounting, from the Wharton School of Business, University of Pennsylvania, in 1982. He is also a graduate of the prestigious Stuyvesant High School in New York City. Mr. Rothbort is married to Layni Horowitz Rothbort, a real estate attorney, and together they have five children.