Exxon, Chevron to Extend Gains, Investors Say

BOSTON ( TheStreet) -- Oil prices rallied 20% in the fourth quarter, and integrated oil companies such as Exxon Mobil ( XOM) and Chevron ( CVX) benefited.

With the economic rebound showing signs of strengthening, oil may go even higher. Exxon broke profit records quarter after quarter in 2008 when oil prices climbed to a record $147 a barrel.
Exxon

"We're seeing a global economic recovery in 2011, and that should help the oil and gas industry," says Dan Neiman, manager of the Williamsville, N.Y.-based Neiman Large Cap Value Fund, which counts several energy- and oil-related stocks among its holdings. "Intuition tells me that as demand increases, prices will go up. And I see demand increasing."

Oil and gas stocks have outperformed the broader equity market over the past three months, with the Dow Jones U.S. Oil & Gas Index rising more than 17% and the S&P 500 adding 8%. That increase has come on the back of rising crude prices. After hitting a low of $64.24 a barrel in late May, oil has rebounded 44% to a high of $92.58 on Jan. 3 and now hovers near $86 a barrel. That's quite a comeback after oil prices plunged to $40 a barrel in the throes of the economic crisis.

Still, not all oil stocks have fared the same. ConocoPhillips ( COP) is the big winner, surging 34% last year, followed by Chevron, which climbed 18%. Exxon Mobil, the largest oil company, rose 6.5%, about half that of the S&P 500. Still, fund managers see more room for these stocks to run.

"Energy is a big-picture thing," Neiman says. "It's not just oil and gas prices, but the way the consumer looks at them. Crude oil will go above $100 a barrel. So, we feel this is a good play for us now."

Cliff Draughn, chief investment officer of Savannah, Ga.-based Excelsia Investment Advisors, says oil stocks may be attractive for another two to five years. As an asset-allocation firm, Excelsia owns Chevron and Exxon Mobil and is in the process of buying ConocoPhillips.

Draughn says that as long as governments continue to try to monetize debt by printing money, investors will be on the hunt for a stored value.

"They're not going to get that protection in buying bonds. They're going to get it by buying hard assets or corporations that hold those assets," he says. "I would love to be able to take 10 barrels of oil and put them in my backyard and simply siphon off when it's profitable, but we don't have that luxury as passive investors. We can't go buy a tanker of natural gas or a barge full of oil. As investors, we need to look at the next best alternatives."

Draughn says oil stocks still offer value as well as protection if the broader market sours.

"Keep in mind they're not immune to the market. If the market has a 10% correction, they're going to suffer along with it," he says. "But they suffer a lot less than your Google ( GOOG) or Apple ( AAPL) or Bank of America ( BAC) or Citigroup ( C). All things go down with margin calls, but if you're looking for stored value and consistency, commodity-driven companies such as these three are clearly a better play for the low-risk investor."

As an investment manager with $187 million in assets under management with a strong push into commodity stocks, Draughn says he pays little attention to the expectations of analysts on Wall Street. He instead reviews companies' balance sheets when they report earnings, paying close attention to cash flow from operations. He suggests investors perform the same due diligence.

"We look at the earnings, obviously, but we want to look at where the operating earnings came from," he says. "I don't want to see a lot of accounting gimmicks in the earnings. As long as my cash flow from operations is up, I'm a happy camper. It all comes down to their margins and their refining operations and distribution. It comes down to what they still have stuck in the ground out there that they can monetize in the future."

On the next few pages, TheStreet previews these oil stocks and what fund managers are looking for in fourth-quarter financial results from Exxon Mobil, Chevron and ConocoPhillips.

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Exxon Mobil ( XOM)

Company Profile: Exxon Mobil is the largest oil refiner in the world and is also the biggest publicly traded international oil and gas company. Based in Irving, Texas, Exxon has several business operations, including exploration, development, marketing, production, refining, and chemicals and specialties.

Reporting Date: Jan. 31, before the market opens

Expectations for the Quarter: Analysts are forecasting a profit of $1.60 a share on revenue of $99.1 billion for Exxon's fourth quarter, according to a poll by Thomson Reuters. That compares to the year-earlier quarter, when Exxon posted earnings of $1.27 a share and revenue of $89.8 billion.

Fund Manager Take: Draughn says Exxon Mobil is attractive as the company is still growing. From a balance sheet perspective, Exxon is also a lot bigger in terms of reserves compared to the other oil names.

"But Exxon isn't the big gorilla necessarily. It's the big chimpanzee with two smaller chimpanzees with Chevron and Conoco," Draughn says. "If you look at all three of them as a percentage of their assets, they have a significant amount of current assets."

Like the other oil stocks, Draughn finds value in Exxon based on its forward price-to-earnings ratio of 11.6, which is at a discount to the market. He is also enticed by the company's 2.2% dividend yield.

Neiman, on the other hand, doesn't find Exxon as attractive as some other oil investments.

"We actually had Exxon Mobil in the portfolio, but we didn't like the way they were handling their business model," Neiman says. "They were so large that they were having trouble with certain aspects of their business. Their stock price wasn't performing as well at the time as Chevron. Roughly a year ago, we unloaded our Exxon position."

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Chevron ( CVX)

Company Profile: Chevron is also one of the largest corporations in the U.S. and is engaged in oil and gas exploration, production and refining. Chevron is headquartered in San Ramon, Calif.

Reporting Date: Jan. 28, before the market opens

Expectations for the Quarter: On Jan. 11, Chevron in an interim update said rising crude oil prices likely resulted in higher fourth-quarter results compared to the third quarter. Chevron didn't provide an estimate of fourth-quarter earnings, and analysts polled by Thomson Reuters are expecting, on average, that the company booked a profit of $2.40 a share on revenue of $55.9 billion. In the fourth quarter of 2009, Chevron had earnings of $1.53 a share and revenue of $48.6 billion.

Fund Manager Take: The Neiman Value Fund has over $20 million, and Chevron is the largest holding in the portfolio with a weighting of 2.9%. Neiman and his father, who have managed the fund for seven years, seek out companies with value and dividends, and they also purchase conservative covered call writing on stocks to capture the option premium. To them, Chevron is emblematic of the companies they seek to invest in.

"If you look at Chevron individually, the stock has a price-to-earnings ratio of 11, it has really low debt and a lot of cash on the books," Neiman says. "Even though it's at its 52-week high, we still see Chevron as undervalued. The traditional P/E ratio is roughly 18 to 20, so Chevron is attractive on a relative price basis. But you can look at any other numbers, including cash or debt, and Chevron is attractive."

Neiman also notes that Chevron "is one of the cheapest stocks on the Dow on P/E alone. It's also one of the highest-yielding dividend stocks on the Dow. If you combine those things, that's what our fund is all about. It's a perfect fit for us."

Away from the valuation numbers, Neiman says investors should note that Chevron is streamlining its downstream business, and at the same time the company is investing more in its upstream business. "They're moving into Asia, which has huge profit potential," he adds. "We see a lot of value there."

Neiman says that in addition to Chevron, the fund has several other oil-related stocks in the portfolio, including Schlumberger ( SLB), Occidental Petroleum ( OXY) and Baker Hughes ( BHI), among others.

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ConocoPhillips ( COP)

Company Profile: ConocoPhillips is the third-largest integrated energy company in the U.S. and the fifth-biggest refiner in the world.

Reporting Date: Jan. 26, before the market opens

Expectations for the Quarter: ConocoPhillips should report a profit of $1.31 a share on revenue of $46 billion, according to a poll of analysts by Thomson Reuters. In the fourth quarter of 2009, ConocoPhillips booked a profit of $1.16 a share on revenue of $43.6 billion.

Fund Manager Take: Draughn, who says his firm is in the process of purchasing ConocoPhillips shares, doesn't have a favorite stock among the three big integrated oil names as they "all have the same fundamentals."

Like Chevron and Exxon, Draughn is attracted to ConocoPhillips' dividend yield (3.3%) and valuation metrics.

"I love the fact that I can buy ConocoPhillips at 10 times earnings with a 3% dividend yield and a balance sheet with a ton of cash," Draughn says. "Same is true for Exxon and same is true for Chevron. It's a value play."

-- Written by Robert Holmes in Boston.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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