OK, players -- Apple's (AAPL) dividend and share buyback plan has finally been announced. But who cares? Let's talk oil stocks.
Saturday's issue of Barron's had an exhaustive article touting Total (TOT) as the best integrated oil stock out there. This piece gives me an opportunity to talk about the integrated sector -- and to explain why I've long avoided talking about any of the monster integrated behemoths.
The last two years of quarterly reports from the majors speak to important limiting factors surrounding the growth profiles for all the biggies, whether Exxon Mobil (XOM), Chevron (CVX), ConocoPhilips (COP) or the overseas leaders BP (BP), Shell (RDS.A) and Total. To simplify hundreds of pages of reports from these six leaders in the industry, it is clear that every one of them faces a declining volume profile that will somewhat limit its growth potential over the coming decade, at least in oil. To continue the simplification, every barrel of oil that is being extracted today is more difficult and expensive to produce than yesterday, both in the technology required (as in offshore deepwater drilling and in hydraulic onshore shale) and in the geographical and geopolitical hurdles required to find and produce oil in hotspots as far afield as the Arctic, Iraq and Angola.
For mega-cap integrated oil companies, these costs and the advances in production are overwhelming the earnings profiles. These are not, to put it mildly, very sleek and opportunistic companies able to shift focus and quickly adapt to new opportunities and difficulties. They are aircraft carriers maneuvering in canal locks; they must plan well ahead for any "quick turns" and stops. When Exxon CEO Rex Tillerson says his concentrated efforts are about profits five years from now and he's unconcerned with what's happening today, he's not kidding -- five-year plans are about as agile as Exxon can get.
This doesn't make big integrated oil a bad investment -- quite the contrary -- but it does make these big oil shares some of the lowest-beta plays, still tied very closely to the price of the crude barrel and the dividend that they deliver and how readily they can grow that dividend going forward. For me, that levers the value in any of these shares even more strongly to their trading price than just about anything else in the energy sector.
Now you might understand why I've been less excited about this sector in the past several months -- ConocoPhilips looks the monster buy at $78, less exciting above $105; Exxon is a generational investment at $68, less interesting at $85.
But here's where the long-term view on these mega-caps could change -- when we start talking about natural gas. For long-term planners in the energy industry, there is nothing with quite the enormous opportunity as with natural gas, internationally but particularly here in the United States. And investors seem to forget that the six mega-cap oil companies deliver the vast majority of natural gas into the global marketplace; domestically, Exxon is still the No. 1 producer.
Therefore, assessing the mega-caps today with today's share prices they are at today requires understanding each of their long-term plans for natural gas -- a topic I will take up in my next column, where I'll try to actually pick a few winners for further long-term investing among the monster oil behemoths.