The Best Mega-Cap Oil Stock Right Now

The large oil companies have experienced their fair share of political and legal debacles both in international and domestic waters. Chevron (NYSE: CVX) has the Brazilian government trying to ban it from drilling off its shores, YPF was nationalized by the Argentine government, and British Petroleum (NYSE: BP) is still recovering from its Gulf spill and PR disaster from a couple years ago. Exxon Mobil (NYSE: XOM), ConocoPhillips (NYSE: COP), and Shell (NYSE:RDS.A), the remaining members of the Big Five oil companies have had less negative press related to governmental intervention on its assets, but continued strong performance due to high crude prices may not last. Given that all big five oil companies are reporting earnings in the upcoming couple weeks, we are doing a pre-earnings roundup.


CVX: As alluded to before, the Frade operations in Brazil continue to be challenged. Until there is additional clarity from the government, we view this as a continued headwind for the stock.  In Q1, US gas and international liquids volumes were down more than analysts expected, leading us to feel that production growth will be limited for the remainder of this fiscal year. However, the company has a number of ongoing developments. There should be an update on Lineham Creek, Davy Jones, Bear’s Hump, and the Coronado prospect in the upcoming quarters. Positive news from any of these developments would bode well for the stock price. CVX currently trades at 7.5x 2013 earnings.

BP: Yes, BP lost an opportunity to enter Russia with Rosneft, revealing a disconcerting corporate governance policy in the process at its Russian subsidiary, TNK-BP. However, we think some may have glossed over TNK-BP dividend hike during this period. BP also did not complete its 60% stake in Pan American Energy LLC to Bridas for $7.1 billion. We think after the YPF nationalization, the bears might argue that this position’s value should now also be zeroed though there is no indication of that yet. We also note that BP had 21,800 retail sites, which have not been factored into the market’s current valuation. The positives have been overlooked and the negatives highlighted. At a very low relative valuation (6.0x 2013 earnings) and what we think is overly bearish sentiment in the markets, BP is our mega-cap oil pick. Conservative value investor Seth Klarman‘s $500 million position also signals an opportunity in the stock.

XOM: Just this week, XOM signed a deal with Rosneft, the Russian oil company. Rosneft is buying a minority stake in XOM to gain access to select North American projects, and in return, XOM is going to be able to tap into the vast Russian reserves in the Kara Sea. The agreement also stipulates that Rosneft can get a 30% stake in the Texas-based La Escalera Ranch project through its American subsidiary Neftegaz Holding in addition to the opportunity to take a 30% stake in 20 of XOM’s Gulf of Mexico projects. Russian Deputy Prime Minister Igor Sechin indicated a commitment to offer tax relief provisions to develop these resources. This is very positive given that government interference in oil assets has been troublesome in the region. Certainly, any direct contribution to its bottom line is years away, but updates about the asset would play a catalyst role for the stock. XOM currently trades at 9.5x 2013 earnings, which is not particularly compelling from a valuation standpoint and is  held by hedge fund managers Michael Kaufman, T. Boone Pickens, Tom Gaynor, and Geoffrey Mccuskey.

COP: COP has plans to sell $10 billion of assets in 2012, namely from Vietnam. This is important from a strategic standpoint. We like COP’s asset sale intention, particularly its US refining assets in which margins suffered last year. After the margin hit, COP decided it would focus on upstream exploration and production and spin off its downstream and transportation. Phillips 66 will cover refining, transportation, chemicals, and pipelines. Furthermore, COP and Oil and Natural Gas Corp of India will primarily explore and develop shale-gas reserves in India and North America. We estimate that COP can grow production at 1-3% based on growth in US and resumption in Libya, leading to a solid quarter for COP. COP currently trades at 8.0x 2013 earnings

RDS: The reported oil sheen off the coast of Louisiana has been dissipating. However, shares have stayed depressed since RDS alerted the National Response Center (NRC) on April 11 of the sheen, measuring 1 mile by 10 miles, in the Gulf of Mexico. The sheen is located between the Mars and Ursa platforms but the source remains to be identified. For potential investors, we would wait for certainty regarding the source of the leak before putting money down. And with earnings coming up we think it would be wise to hear management’s thoughts on East African liquefied natural gas (LNG), Alaskan exploration drilling, and shale gas exploration in China to gain some directional clarity for the company moving forward. RDS currently trades at 7.3x 2013 earnings.