In this week’s blog post, I will be comparing three oil and gas behemoths – Chevron, Exxon Mobil, and Royal Dutch Shell. I will use the fundamental data to help us make a determination about which one of these three stocks is worth investing in. Before we get into the numbers, I would like to go over a couple vocabulary words used frequently in the Oil and Gas Industry. After that, I will talk about each company’s overview followed by fundamental analysis. Let’s dive in.
- Upstream: The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas.
- Downstream: The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products through pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals, and fuel and lubricant additives, as well as plastics for industrial uses.
In short, “Upstream” refers to everything from exploring and extracting crude oil to storing and transporting crude to refineries. “Downstream” begins at refining crude oil, and refers to all the products and businesses that arise from those refined products.
Company Overview:
- Chevron (CVX) – Chevron Corporation, through its subsidiaries, engages in integrated energy, chemicals, and petroleum operations worldwide. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as operates a gas-to-liquids plant. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products through pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals, and fuel and lubricant additives, as well as plastics for industrial uses. It is also involved in the cash management and debt financing activities; insurance operations; real estate activities; and technology businesses.
- Exxon Mobil Corp (XOM) – Exxon Mobil Corporation explores for and produces crude oil and natural gas in the United States, Canada/Other Americas, Europe, Africa, Asia, and Australia/Oceania. It operates through Upstream, Downstream, and Chemical segments. The company is also involved in the manufacture, trade, transport, and sale of crude oil, petroleum products, and other specialty products; and manufactures and markets petrochemicals, including olefins, polyolefins, aromatics, and various other petrochemicals. As of December 31, 2018, it had approximately 24,696 net operated wells with proved reserves of 24.3 billion oil-equivalent barrels.
- Royal Dutch Shell (RDS.A) – Royal Dutch Shell plc operates as an energy and petrochemical company worldwide. The company operates through Integrated Gas, Upstream, and Downstream segments. It explores for, and extracts crude oil, natural gas, and natural gas liquids; markets and transports oil and gas; produces gas-to-liquids fuels and other products; and operates upstream and midstream infrastructure necessary to deliver gas to market. The company also markets and trades natural gas, LNG, crude oil, electricity, carbon-emission rights; and markets and sells liquefied natural gas as a fuel for heavy-duty vehicles and marine vessels. In addition, it trades in and refines crude oil and other feed stocks, such as gasoline, diesel, heating oil, aviation fuel, marine fuel, biofuel, lubricants, bitumen, and sulphur; produces and sells petrochemicals; and manages oil sands activities. Further, the company produces base chemicals comprising ethylene, propylene, and aromatics, as well as intermediate chemicals, such as styrene monomer, propylene oxide, solvents, detergent alcohols, ethylene oxide, and ethylene glycol.
Fundamental Overview:
As you can see in the table below, I compared each company’s profitability through Return on Equity (ROE) % and Return on Invested Capital. I compared each company’s quality of cash flow by looking at Free Cash Flow to Net Income. I looked at each company’s financial health through Debt to Equity Ratio and Current Ratio. Lastly, I compared each company’s efficiency by looking at the Inventory Turnover. The Price to Earnings (P/E) ratio gives us an idea of how expensive the stock price is compared to the company’s earnings. Here is the PDF version of the table below.
As you can see from the table above, Exxon Mobil has the highest return on equity, lowest debt to equity ratio, and lowest free cash flow to net income ratio. Out of the three stocks, Exxon Mobil has the slowest inventory turnover, and the lowest current ratio; on the other hand, Chevron is the most efficient out of the three stocks since it has the highest inventory turnover. Royal Dutch Shell gives the highest return on invested capital, and had the highest current ratio; Exxon Mobil is a close second in RoIC. In my opinion, none of these companies are bad. Chevron’s and Shell’s Free Cash Flows to Net Incomes is cautionary. However, that ratios is still under control and just need monitoring if you decide on investing in either Chevron or Shell.
Intrinsic Value and Expected Rate of Return:
I performed a Discounted Cash Flow (DCF) analysis with a 15% discount rate. As pictured below, I found the Intrinsic Value of CVX to be $128 per share, XOM to be $69 per share, and RDS.A to be $82 per share. In comparison to the intrinsic value, the current price of CVX is $121.48 per share, XOM is $74.58 per share, and RDS.A is $64.48 per share. So, it looks like CVX and RDS.A are both undervalued. RDS.A provides the highest margin of safety since the difference between its intrinsic value and current price is the greatest. Here is the PDF Version of the table below.
The last row in the table above is for Expected Rate of Return (RoR). If you were to invest your money at the current stock price, the expected RoR gives you an idea of what kind of annual return can you expect to get on that investment for the years to come. Expected RoR takes into account the Free Cash Flow (FCF) for the past 10 years, and the likelihood of FCF growth for the next 10 years. Here are the past and projected FCF arrays along with the Upperband, Lowerband, and Most Likely assumptions for CVX, XOM, and RDS.A:
As you can see from the graphs above, there have been times when the free cash flow dipped below zero for CVX and RDS.A. This is why I used -8% FCF growth for my lower bound, and -1% FCF growth for my most likely bound for both Chevron and Shell.
Even though Exxon Mobil has the best fundamentals out of the 3 stocks we compared today, I think Royal Dutch Shell has the best bang for your buck. Shell has a low PE ratio, is undervalued with a high margin of safety, and has 8.8% expected rate of return. Now if you don’t want to buy Shell, another approach would be to wait until the stock price of Exxon Mobil drops below its intrinsic value (with adequate margin of safety). On the other hand, Chevron is undervalued (intrinsic value is higher than its current price), but it does not have a high margin of safety that I want. As a result, if I were given a choice today to invest in Chevron, Exxon, or Shell, I would most likely pick Shell. Lastly, I would want to review the Annual Report (10K), especially the risks factors section, before investing in Shell.
Hope you learned a little and found this blog post helpful. We analyzed 3 Oil and Gas Companies: Chevron (CVX), Exxon Mobil (XOM), and Royal Dutch Shell (RDS.A). We compared various fundamental ratios, intrinsic values, and expected rate of returns. As always, you can sign up for our mailing list here. Like us on our Facebook page here. Thank you!
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Superior North LLC’s content is for educational purposes only. The calculators, videos, recommendations, and general investment ideas are not to be actioned with real money. Vyom Joshi is not a professional money manager or a financial advisor. Contact a professional and certified financial advisor before making any financial decisions.
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