Enrich your portfolio with these four global oil stocks

These are well-run diversified businesses that boast strong balance sheets, undeniable growth prospects and are trading at discounts to our fair value estimates

Vikram Barhat 18 September, 2019 | 1:06AM

Oil Barrels

Last week’s drone attacks on Saudi Arabia’s oil facilities caused one of the biggest disruptions to oil production ever. The attack sent crude prices rocketing global markets cratering, and prompted the U.S. to threaten a military response.

These developments have brought sharp focus on big energy stocks that are trading at an attractive discount to their fair value, despite the sector bouncing back from last year’s disastrous performance. The S&P 500 Energy Index has gained over 12% for the year to date, as of Sept 16. “A higher geopolitical risk premium in the crude price could boost the near-term earnings for oil and gas companies in our coverage in accordance with a stronger Brent futures curve,” says Morningstar analyst Mark Taylor. Longer term, geopolitical uncertainty is likely to continue to create strong tailwind for energy stocks, supported by healthy demand for oil and OPEC’s push for curbing oil production.

For investors looking to bump up or broaden their energy exposure, now may be a good time to look at leading oil giants. These are well-run diversified business operations that boast strong balance sheets, undeniable growth prospects and are well positioned to exploit favourable energy market dynamics including higher oil prices and demand, according to Morningstar equity research.

Total SA ADR

 

Ticker

TOT

 

Current yield:

5.57%

 

Forward P/E:

9.22

 

Price

US$52.64

 

Fair value:

US$73

 

Value

29% discount

 

Moat

None

 

Moat Trend

Stable

 

Star rating

*****

Data as of September 16, 2019

French energy major, Total (TOT) is an integrated oil and gas company that explores for, produces, and refines oil around the world. The company operates refineries primarily in Europe, distributes refined products in 65 countries, and manufactures commodity and specialty chemicals. It also owns a 19% stake in Russian oil company Novatek.

Total is poised to boost its cash flow over the next several years through production growth and cost cuts. “Production growth should prove to be a major driver of cash flow growth during the next five years, with Total anticipating averaging volume of growth of about 5% per year through 2022, the highest among its peers, and expected production growth of 9% for 2019,” says a Morningstar equity report.

That rate of growth, the report says, is achievable considering Total has over 10 projects under construction and a large project queue awaiting final investment decisions. On the other hand, the firm’s efforts to crimp costs should drive margins higher. “Already one of the lower-cost operators, Total aims to reduce operating costs to US$5.50 per barrel of oil equivalent in 2019, a nearly 50% cut from 2014 levels,” says Morningstar equity analyst Dave Meats, who pegs the stock’s fair value at US$73, and projects annualized savings from cost reduction to exceed US$5 billion by 2020. 

Chevron Corp

 

Ticker

CVX

 

Current yield:

3.92%

 

Forward P/E:

16.29

 

Price

US$124.12

 

Fair value:

US$136

 

Value

11% discount

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

****

Data as of September 16, 2019

The second-largest oil company in the U.S., Chevron (CVX) runs exploration, production, and refining operations worldwide. The energy behemoth’s production operations are spread across North America, South America, Europe, Africa, Asia, and Australia. Its refineries in the U.S., South Africa, and Asia churn out 1.6 million barrels of oil a day.

Chevron benefits from an oil-leveraged portfolio that has led to peer-leading margins and returns on capital. The company is expected to “maintain its edge as it moves into the next phase of growth, which is centered on leveraging its large Permian Basin position,” says a Morningstar equity report.

The oil heavyweight’s robust growth is underpinned by new production from Gulf of Mexico and western Australia, in addition to the Permian Basin. “In 2018 it realized peer-leading volume growth of 7% and expects similar results in 2019, with growth of 4% to 7% due to continued shale growth and LNG project ramp up,” says Meats, who appraises the stock’s fair value to be US$136.

Exxon Mobil Corp

 

Ticker

XOM

 

Current yield:

4.79%

 

Forward P/E:

18.21

 

Price

US$73.73

 

Fair value:

US$85

 

Value

15% discount

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

****

Data as of September 16, 2019

The world’s largest refiner, ExxonMobil (XOM) is an integrated oil and gas company that operates in North and South America, Europe, the Middle East, North and sub-Saharan Africa, and the Asia-Pacific.

“We continue to rate Exxon as the highest-quality integrated firm, given its ability to capture economic rents along the oil and gas value chain,” says a Morningstar equity report, adding that the company plans to ramp up capital spending with a view to double earnings and cash flow from 2017 levels by 2025 and boosting its return on capital employed to 15%, from 9% in 2018.

Despite investor demand for tighter capital discipline, Exxon justifies its investments based on the assertion that it holds a host of high-return projects that can leverage its superior integrated model and that its downstream and chemicals segments are key differentiators. The reasoning finds Meats’ approval who argues the historical returns support the contention. “It stands to reason it should invest to maximize those advantages,” says Meats, who estimates the stock to be worth US$85. 

Royal Dutch Shell PLC ADR Class B

 

Ticker

RDS.B

 

Current yield:

6.57%

 

Forward P/E:

9.35

 

Price

US$58.34

 

Fair value:

US$78

 

Value

27% discount

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

****

Data as of September 16, 2019

Dutch oil and gas titan, Royal Dutch Shell (RDS.B) engages in oil and natural gas production. The integrated company’s production and reserves are spread across Europe, Asia, Oceania, Africa, and North and South America, while its refineries are located in the Americas, Asia, Africa, and Europe.

Like its peers, Shell has squeezed its cost base, partly by reducing head count and improving its supply chain. These steps have helped restore its cash dividend and allowed it to remain competitive in a world of US$60/barrel oil. “Furthermore, the addition of BG Group’s low-cost production reduces Shell’s per-barrel operating cost,” says a Morningstar equity report, adding that the company has already reduced operating cost by 20% from 2014 levels, and could cut it more.

As a result of its collective efforts, including spending reductions, design standardization and divestiture of capital-intensive low-return assets, “Shell should boost margins and improve returns by 2020, leaving it in a better competitive position,” says Meats, who recently lowered the stock’s fair value estimate from US$83 to US$78, prompted by tougher refining environment and lower midcycle oil and gas prices.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Chevron Corp117.30 USD-0.60
Exxon Mobil Corp69.66 USD0.22
Royal Dutch Shell PLC ADR Class B57.30 USD-0.16
Total SA ADR52.63 USD-0.66

About Author

Vikram Barhat

Vikram Barhat  Vikram Barhat is a Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry. He also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.