The oil and gas industry has struggled with a variety of issues over the past five years, but many of the companies continue to post strong numbers and offer great investments. Exxon Mobil (XOM) is the largest at $400 billion, but the appeal lies in its solid dividend and its upcoming exploration deal in Russia. Since being the biggest does not always mean something is the best, I will look at Exxon Mobil (XOM) and compare to rivals such as BP (BP) and Chevron (CVX) to see how it shapes up as an investment.
Exxon Mobil continues to grow, as evidenced by its agreement with Russia to explore for oil in a portion of the Arctic Ocean that is in the country's jurisdiction. Creating a partnership with Russian-controlled oil company Rosneft, Exxon Mobil agreed to hand over to Rosneft assets in other parts of the world in exchange for this mega-deal.
Although Russia has tightly controlled its natural resources over the past decade, the joint venture by Exxon Mobil and Rosneft could help to loosen that grip. The companies will collaborate on three exploration licenses in the Russian Baltic, an area that holds great potential, yet is largely unexplored.
Throughout its efforts to acquire new projects, Exxon Mobil has managed to keep its financials very stable. Although it has a price to book ratio of 2.6, the stock has high upside potential and will likely rise by 10% or more this year. Exxon Mobil's number could improve even more should natural gas prices rise in the months ahead.
In a different position than Exxon Mobil, Chevron is battling to get back on top after a rough couple of years. Concerns about the effects of oil prices on the economy have affected all the oil producers, but Chevron is also defending itself from an $18.2 billion lawsuit judgment in Ecuador. Although judicial misconduct charges are jeopardizing that decision, negative publicity like this can influence corporate revenue and earnings, which both declined for Chevron (year-to-year revenue was up 13% and earnings down 3.2%).
While its earnings were down, Chevron does have some positive indicators. The company's share price is up 10% over the last year, and it is trading nearly 8% above its 200-day moving average. With a low price to earnings ratio of 8.1 and a price to book of just 1.8, the company's stock is ready to rise. With that said, investors should still pay close attention to the situation in Ecuador before deciding to invest in Chevron.
With the uncertainty of natural gas prices affecting Exxon Mobil and the legal battle in Ecuador hanging over Chevron, BP might be the best option in the oil and gas arena. Another heavyweight in the sector with $148 billion in capitalization, BP is positioned to make some big gains in 2012. An excellent dividend payer at $1.92 per share for a yield of 4.1%, BP is also looking at some hefty growth, with its target estimate suggesting a 20% increase in share price over the next 12 months.
Much like Chevron, BP is litigating over the Gulf of Mexico spill that devastated large portions of the US Gulf Coast. The difference in this case is that BP has reached a $7.8 billion settlement and is only waiting for final approval from the courts. News of this settlement helped to change forecasts and drive the company's target estimate to over $58 per share.
The settlement is not the only good news for the company. BP announced plans to invest $150 billion in exploration over the next five years. The company intends to use this money to find new reserves and help to offset worldwide demand. BP made this determination after predicting that worldwide demand for oil would increase by 30% over the next 30 year, necessitating new sources.
Oil and gas companies in North America are waiting for the US government to pass legislation for the important Keystone XL Pipeline. Political wrangling has delayed approval of the project, which will create a 1,700-mile pipeline from the tar sands region in Alberta to refineries along the Texas Gulf Coast.
Offering an enticing combination of growth and dividends, Exxon Mobil, Chevron and BP are all solid investments. I believe investors should hold Exxon Mobil and Chevron, but I do not recommend taking any new positions in these companies at this time. Exxon needs time re-energize its profits and start its Arctic Ocean project, while Chevron needs to resolve its potentially devastating legal situation in Ecuador before it can assure investors that last year's big profits will continue.
Although it is recovering from its own disaster, BP is farther along than its two competitors are. This advantage is important because it shows investors that the company is ready to move ahead. BP is also committed to spending $150 billion on exploration over the next five years. This sizable amount gives the company a better chance of making discoveries that will generate profits for decades to come. For this reason, I see Exxon as the best oil and gas stock on the market at this time. I recommend the stock for anyone looking for a sound investment in the oil and gas sector.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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