The Not So Supermajors
There are six integrated oil and gas companies, all headquartered in the U.S. or Europe, that are considered to be the world’s supermajors. Starting from the largest, they are ExxonMobil (NYSE: XOM), Shell (NYSE: RDS-A), Chevron (NYSE: CVX), Total (NYSE: TOT), BP (NYSE: BP), and Eni (NYSE: E). When people talk about “Big Oil,” this is it.
Because of their large size and integrated operations, the supermajors are generally considered to be among the more conservative energy investments; safe harbors during sector storms. But oil and gas production remain a major part of their business, so they have not been immune from the effects of dramatically lower commodity prices. These have been only partially offset by high refining margins in their downstream operations.
Last month in Big Oil, Big Problems I took a look at fourth-quarter earnings for ExxonMobil, Shell, Chevron, and BP. However, these companies hadn’t yet all released details regarding year-end reserves and impairments. Now that this information is available, I would like to take a deeper dive to see whether the valuations seem reasonable given the current market conditions.
I want to present the data in a series of tables. Let’s start by looking at some of the key financial and performance measures. Companies are sorted in descending order by enterprise value (EV):
- EV – Enterprise Value in billions of dollars as of March 10, 2016
- Yr Ago EV – EV in billions of dollars on March 10, 2015
- Change – Change in EV over the past year
- YTD Ret – Total shareholder return (TSR), including dividends, in 2016
- 1 Yr Ret – TSR for the past 12 months
- Yield – Trailing yield based on the past 12 months of dividends
- EBITDA – 2015 earnings before interest, tax, depreciation and amortization
- Debt – Net debt at the end of Q4 2015
Texas-based ExxonMobil is by far the largest company of the group. Its enterprise value is nearly equal to that of Shell and Chevron combined, and is bigger than that of the three smallest supermajors in the aggregate. The average EV for members of this club is $189 billion, which is about $10 billion less than it was a year ago. As a result of the recent surge in crude prices, most of the stocks on the list are up so far in 2016, but most are also still down over the past 12 months.
U.K.-based BP is the most expensive company on the list based on EV/EBITDA, and the most indebted relative to its EBITDA. Its EBITDA, however, has been skewed by ongoing charges related to the 2010 Deepwater Horizon oil spill at the BP-operated Macondo prospect in the Gulf of Mexico. In July BP agreed to pay $18.7 billion over 18 years to settle the federal and state claims and fines over the spill, pushing its total tab for the disaster to nearly $54 billion.
Let’s next examine how the downturn over the past year and a half has impacted these company’s balance sheets:
- EBITDA – EBITDA in billions of dollars for the trailing twelve months (TTM)
- FCF – Levered free cash flow for the TTM
- Net Debt – Total debt minus cash and cash equivalents at the beginning of the year in billions of dollars
- CapEx – Capital expenditures in billions of dollars for 2015
It isn’t surprising that most of these companies have bled cash over the past year. Italy’s Eni and California-based Chevron are hemorrhaging the most, albeit for somewhat different reasons. Eni blamed low commodity prices, unfavorable exchange rates and higher interest expenses for its loss in 2015. However it has managed to pay down some of its debt over the past three years while keeping capital spending flat.
For Chevron, however, the big issue has been heavy capital spending on mega-projects like the Gorgon offshore natural gas field off Western Australia. Chevron hasn’t recorded positive annual free cash flow since 2012, and with the downturn in commodity prices it likely won’t see it again as soon as once hoped. Note that Chevron’s capital expenditures were higher last year than even ExxonMobil’s.
Shell is the only supermajor to have generated positive FCF in 2015, and it has also made significant strides in paying down debt over the past three years. Over that same time period, ExxonMobil’s debt nearly doubled, and Chevron’s increased nearly seven-fold as it invested heavily in its mega-projects. The other three supermajors have had modest changes in debt levels since 2014.
Shell looks relatively attractive based on the metrics above, but now let’s take a look at these companies’ oil and gas production:
- Prod Tot – Average daily production of oil, natural gas, and natural gas liquids in millions of barrels of oil equivalent (BOE) per day
- YoY Change – Percentage change relative to 2014
- Reserves – Year-end total proved reserves, in billion BOE
- EV/Res – Enterprise value divided by total reserves, in dollars per BOE
- SM – Standardized Measure, the present value of the future cash flows from proved reserves as of year-end
- NA – These companies have not yet released this information
This is where some red flags start to appear for Shell. Not only did it suffer a year-over-year decline in oil production, but the company saw year-end reserves decline (as did XOM and BP.) However, given the steep decline in commodity prices, the reserves declines are relatively modest. Some of the more aggressive exploration and production (E&P) companies have seen proportionally much larger reserves write-downs.
Note that BP’s proved reserves continue to look cheap relative to its enterprise value, while Shell’s are the most richly valued by the metric. Also of note is that BP is including its proportional equity share of Rosneft in its production and reserves numbers.
The other thing to note here is the huge decline in the Standardized Measure (SM) for the companies that have thus far reported the number. Recall that the SM is the present value of the future cash flows from proved oil, natural gas liquids (NGLs) and natural gas reserves, minus development costs, income taxes and exploration costs, discounted by 10% annually. It is calculated on the basis of the average commodity prices for the year, so the declines of more than 50% were expected. Further, because these companies all have significant operations beyond oil and gas production, the comparison between them isn’t as straightforward as with pure E&P companies.
This exercise suggests that none of the integrated supermajors is a screaming buy in the current market. BP’s reserves appear to still be significantly undervalued, but Chevron may be digging itself a deep hole by taking on so much debt. While commodity prices remain depressed those mega-projects won’t be the cash cows they once seemed.
In the next issue I am going to look at the same metrics for the pure E&P companies. In contrast with the supermajors, there are many more E&P companies to sift through as we continue our hunt for bargains.