Ranking The 6 Oil & Gas “Super-Majors” From Best To Worst

Energy sector stocks are famous for their high dividends.This makes the sector a favorite of income investors looking for potential high yield investments.

Energy sectors stocks have become even more popular lately thanks to the strong rally of the oil price since last summer. While the price of oil remained suppressed for three years, it has enjoyed an impressive rally and is now trading near a 3.5 year high thanks to the support of OPEC and Russia.

The supply glut of oil has been eliminated and investment cuts from most large producers in recent years will continue take their toll on the global supply. The price of oil is likely to remain strong for the foreseeable future because of this.

Nevertheless, as some stocks have already priced most of the expected earnings growth of the upcoming years, investors should be particularly careful in their choices.

In this article, we will rank the six oil super majors from best to worst, based on their expected 5-year returns. In order to calculate their 5-year returns, we have assumed that all the stocks will revert to their 10-year average P/E ratios within the next five years.

#1 Super Major Oil Stock: Total (TOT)

Total is the 5th largest oil and gas company in the world, with a market cap of $161 billion. Like the other oil giants, it is a fully integrated company and thus operates in three segments; upstream, downstream (mostly refining) and marketing.

Total exhibited much better performance than its peers during the 3-year downturn of the oil market that began four years ago. During this period, in which the oil price plunged up to 70%, the EPS of Total fell only 49% whereas those of Exxon Mobil and Royal Dutch Shell plunged 75% and 87%, respectively, and Chevron and BP posted losses in 2016.

The key factor behind the resilience of Total was its superior refining segment. During the rough years of refining (2008-2013), the upstream segment was generating about 90% of the total earnings of all the oil majors. Consequently, the other oil majors sold many of their refineries during that period, failing to see that their refining segment was their hedge against a potential plunge of the oil price. Total maintained almost all its refineries and hence it has reaped the full benefit from the high refining margins that have prevailed in the last four years.

Total also has another competitive advantage when compared to its American peers. It produces only a minor portion (less than 10%) of its natural gas in the U.S. and hence its average selling price of gas is much higher than the price of Henry Hub. Moreover, while all the oil producers drastically cut their production costs during the recent downturn, Total managed to reduce this cost to 5.4 $/bbl, which is nearly half of the production cost of most of its peers.

Total Production Costs

Source: Investor Presentation

Like most of its peers, Total failed to grow its production during 2010-2014. However, the company has returned to a solid growth trajectory lately. It grew its output 5% last year and expects to grow it by 6% this year thanks to the start-up of 8 major projects. Moreover, it expects to continue to grow its output by 5% per year for at least the next four years. Therefore, Total is properly positioned to enjoy a double boost in its results in the upcoming years; higher output and a strong oil price.

Given a 5% annual growth in its output and at least a 2% annual rise in the oil price, Total is likely to grow its EPS by at least 7% per year, without taking into account its leverage on the oil price, which will boost its results even further. As the stock is currently trading at a P/E ratio of 11.9, which is equal to its 10-year average P/E ratio, the stock is likely to offer a 12.0% average annual return over the next five years thanks to 7.0% annual EPS growth and its 5.0% dividend. It is thus likely to offer the highest return in its group with the lowest risk, given its impressive resilience in the fierce recent downturn

#2 Super Major Oil Stock: Exxon Mobil (XOM)

Exxon Mobil is the largest publicly traded oil company in the world, with a market cap of $340 billion.You can see Exxon Mobil’s smaller competitors (and all energy sector dividend payers) by downloading the spreadsheet below.

Click here to instantly download your free list of 200+ dividend-paying energy stocks, along with important investing metrics like price-to-earnings ratios and dividend yields.

In the downturn of the oil market, which began in 2014, Exxon Mobil saw its EPS plunge 75%, from $7.60 in 2014 to $1.88 in 2016. This performance was much better than that of Chevron, BP and ConocoPhillips, which posted losses in 2016, and Royal Dutch Shell, which saw its EPS plunge 87%. Thus Exxon Mobil proved that it is more resilient than most of its peers during downturns thanks to its more integrated structure.

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