Chevron Stays on the Treadmill

 | Nov 01, 2013 | 11:46 AM EDT
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Chevron reported what, unfortunately, has become a typical blah quarter for this gigantic worldwide concern headquartered in the U.S. It seems that something always goes awry for Chevron. As CEO John Watson told us, "Our third quarter earnings were down from a year ago primarily reflecting lower margins for refined products in the current period." So, even though the company earned $5 billion, or $2.63 a share, in the third quarter, its stock is being hammered.

This kind of action with the majors is happening far too often. It's a disturbing trend, because this is an amazing time to be in the oil business, as we know from our domestic companies' numbers. But the major integrateds are just too large to be able to grow their reserves at anything other than a treadmill pace.

Worldwide net oil equivalent production is an astounding 2.59 million barrels per day, so much more than the independents the market covets. Given, however, that the company produced 2.52 million barrels last year, you are talking about an increase of only 70,000 barrels a day. Again, that additional amount of oil produced is much more than most independents produce. But on such a large base, it means very little.

In the meantime, the company bought back $1.25 billion in stock, which, alas, means very little in the scheme of things, even as the company makes a big deal of it, as do all of the major oil companies.

In the end, Chevron is pretty much like Exxon Mobil (XOM) and Royal Dutch Shell (RDS-A) when it comes to the oil business. These are slow-growing companies with a ton of cash that are always trying to replenish oil pumped while maintaining discipline and spending billions on future projects that may not move the needle, because all they do is keep these companies from falling off the treadmill.

I don't mean to denigrate either Exxon or Chevron for what they do, although I am not a fan of Royal Dutch, because it is indeed a lesser operator. I am simply saying that these companies are too big and too unwieldy, and other than their decent dividends, they just aren't stocks worth owning.

You know what they remind me of, these three? They remind me of some of the old-line big pharmaceutical companies like Pfizer (PFE), Eli Lilly (LLY) and Merck (MRK). They just don't give you much more than a fixed-income equivalent.

In contrast, fabulous growth companies like EOG Resources (EOG), Noble Energy (NBL) and Pioneer Natural Resources (PXD) remind me of Celgene (CELG), Gilead (GILD) and Biogen Idec (BIIB), always exploring, finding and producing new product. Plus, they aren't bogged down by the big infrastructure needed to refine and market the upstream product. It's why I -- and the market -- favor these stocks more than Royal Dutch, Exxon Mobil and Chevron.

Plus, the independents, as they are known, can always be considered takeover targets. Just this week, I talked with Dan Dicker, our energy expert, about the possibility of Pioneer Natural, the big Permian play, getting a bid from one of these majors. He took it seriously, saying that one of them might be willing to pay upward of $40 billion for the $28 billion company. That's staggering, but it is also a testament to how badly the majors need growth.

Now it is always possible that the big dogs will split up, break themselves into more digestible pieces, because I really believe the parts are worth more than the whole. Until then, though, just like in the pharmaceutical world, it's a lot better to own the juniors than the majors. What a shame that there isn't something in between, a Bristol-Myers Squibb (BMY) or a Johnson & Johnson (JNJ), that offers good growth and a good dividend. That would be the oil to buy. Sorry, I just don't see one out there that fits those characteristics. So stick with EOG Resources, Noble Energy and Pioneer Natural Resources. That, oddly, is where the real value is.

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