Exxon Mobil Corporation (XOM), Royal Dutch Shell plc (ADR) (RDS.B): A Bitter Pill To Swallow – Here’s Why You Should Be Cautious about Oil

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Exxon Mobil Corporation (NYSE:XOM)The oil mega-manufacturers have been having somewhat of a torrid time amidst weak oil prices. At a time when Chinese and American growth looks no brighter than a year ago, oil companies are in a bit of a limbo – do they cut costs, or do they go on the offensive and find new and cheaper reserves to tap in to? As the global output for crude oil decreases on a year-over-year basis, oil prices are projected to spell disaster for oil stocks.

Exxon Mobil Corporation (NYSE:XOM) is the most valuable oil company by market capitalization. The company has invested in key North American shale hot spots like North Dakota’s Bakken region and Canada’s Kearl oil sands, though those investments are still in the early stages. On Thursday, the company reported its lowest quarterly profit in more than three years, as net income fell by 57% compared to the year before. A dip in upstream production combined with weaker refining margins and volumes also saw quarterly revenues fall from $127 billion last year to $106 billion this year. Exxon Mobil is continuing its drive towards geographical diversification as its partnership with Rosneft recently achieved key milestones.

Royal Dutch Shell plc (ADR) (NYSE:RDS.B) recently named Ben van Beurden as its new CEO. The company’s second quarter net income fell by 19.2% primarily due to environmental and political pressures that it faces in Nigeria, where it gets 9% of its world production. On the bright side, Alberta’s energy regulator has recommended approval of Shell Canada’s plan to expand its oilsands production. Five new projects are set to start over the next 18 months and the company invested $11.3 billion during the second quarter of 2013 to help it meet its aim of improving cash flow.

Chevron Corporation (NYSE:CVX), much like its peers, reported a 26% drop in quarterly profits due to thin refining margins and weak oil prices. The company expects output to increase by up to 25% by 2017, however. It plans to achieve this by completing projects which are underway in Australia for liquefied natural gas (LNG) along with marketing LNG from from Kitimat project in British Columbia. Furthermore, Chevron has also signed a $1.5 billion shale oil deal with Argentina’s state-run energy company YPF.

Financial Comparison

Indicator Exxon Mobil Shell Chevron
P/E TTM 9.4 8.1 9.4
Forward P/E 10.5 11.9 9.6
PEG Ratio 3.0 4.8 0.0
Operating Margin % TTM 16.5 10.2 18.7
Dividend Yield
, %
2.54% 5.21% 2.96%
Return on Equity 27.7 14.6 19.5
Current Price $92.46 $66.79 $124.87

Data from Morningstar and Financial Visualizations on August 4th, 2013

The industry has an average price to earnings value of 8.8, making Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) overvalued. Shell is the largest European oil producing company; while being undervalued, it also offers a 5.21% yield with a payout ratio of 41.5%. Future valuation is clouded by the volatile oil prices which will affect all oil producers.

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