January 28, 2015, 1:26 P.M. ET
Chevron & ExxonMobil: Time For Plan B?
By Ben Levisohn
Citigroup’s Alastair Syme and team worry that big-oil companies like Chevron (CVX), ExxonMobil (XOM), and ConocoPhillips (COP) might betting too much on a return to higher oil prices. They explain:
PA Wire/Zuma Press
Until now the industry’s Plan A to restoring profitability has been to rely on a return to higher oil prices. The industry now looks to be adopting a variant – Plan A-star – which emphasises some capex cuts and cost-control but still with a fundamental view that higher oil prices will come to the rescue. We think investor’s interests will only be achieved if the industry commits to full self-help action – a Plan B – where the underlying principle is that oil prices may not recover any time soon…
Within this context we think the equity market’s focus on Big Oil dividend yield as a valuation tool is an unhealthy obsession. The truth is that dividend cover for the group remains poor (the marginal income investor – the bond investor – we think continues to shy away due to the lack of security) and cutting capex will not pay dividends forever. Getting return-on-equity back above cost-of-equity is paramount. If spot oil prices persist then we think the group needs to push through a minimum of 20% cost-reduction in the E&P business to achieve this.
Syme’s recommendation: Buy the companies that are closest to moving to Plan B–that would be Total (TOT) BP (BP), and ConocoPhillips–and avoid those that are still stuck on Plan A– Chevron, Royal Dutch Shell (RDS.A), and ExxonMobil.
Shares of Total have dropped 2.9% to $51.57 at 1:05 p.m. today, while BP has fallen 2.3% to $39.31, ConocoPhillips has declined 2.5% to $63.91, Chevron has slid 2% to $106.07, ExxonMobil has slipped 1.5% to $89.58, and Royal Dutch Shell is off 2.4% at $65.06.
On first glance, the Fed didn’t say much to change the trajectory of the stock market, which remained close to where it had been trading before the FOMC statement was released. Then this paragraph started becoming the focus of attention (thanks to Societe Generale’s Sebastien Galy for pointing this out):
Associated Press
However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated.
Galy says this is an indication that the Fed is “ready to be more hawkish than expected” if necessary, and that seems to have spooked stocks a bit.
Evercore ISI’s Dennis DeBusschere contrasts the Fed’s message with that of the European Central Bank:
Upbeat assessment of growth, inflation could be lower for longer, but driven by transitory factors. So we are at an impasse of sorts. On one hand we have the ECB saying the decline in inflation expectations is something that warrants a continuation of unconventional monetary policy. On the other hand the Fed thinks the decline in U.S. expectations is transitory. Granted, there are many differences between Europe and the U.S., but we thought it was interesting to point that out. Some might have been hoping for a more dovish statement, so from that point of view, this could be disappointing, but the big meeting will come in March. For now, continued overhang on the market about what the Fed will do as the data comes in between now and the March meeting.
The S&P 500 has dropped 0.0.4% to 2,022.16 at 3:09 p.m. today.
In a note released today, Citigroup’s Mohit Bhardwaj and Faisel Khan lowered their earnings-per-share estimates on refiners like Marathon Petroleum (MPC) and Phillips 66 (PSX), even as they reaffirmed their bullishness on the group. Tesoro (TSO), however, got a downgrade. They explain why:
Associated Press
We are lowering our EPS estimates on average by ~20% for 2015 on our revised crude oil differentials. We now expect Brent-WTI to average $4.50 in 2015, down from $8.0/Bbl…In 2015, our estimates are above consensus for Marathon Petroleum and Phillips 66. Despite decline in crude spreads we estimate that Marathon Petroleum is likely to have higher earnings in 2015 compared with 2014…
We believe the refining stocks are already pricing in lower differentials. However, we believe differentials will be volatile and will eventually widen back out over the next 12-18 months once oil storage reaches capacity. We are therefore keeping our bullish stance on refining on wider future differentials and the value of the refiner’s midstream assets…
We are downgrading Tesoro to Neutral on valuation (California recovery, discounted crudes and midstream growth seems to be priced in)…
Shares of Tesoro have gained 1% to $82.17 at 3:30 p.m. today, while Marathon Petroleum has risen 1.3% to $89.81 and Phillips 66 has dropped 1.1% to $68.86.
Although stocks started the day in positive territory Wednesday, that optimism ultimately gave way after the FOMC statement, continuing Tuesday’s weakness.
The Dow Jones Industrial Average lost 195.84 points, or 1.1%, to 17191.37. The Nasdaq slid 43.5 points, or 0.9%, to 4627.99. The S&P 500 fell 27.39 points, or 1.4%, to 2002.16.
Although little of the Federal Reserve’s language changed Wednesday, stocks gave up their initial gains as investors interpreted its statement as hinting at the possibility of an accelerated time table for interest rate increases.
A number of names ended down. Investors lost enthusiasm for Amgen’s (AMGN) fourth quarter on worries that tax credits were doing the heavy lifting in the better-than-expected numbers.
American Airlines (AAL) slipped on a downgrade from Credit Suisse.
Chevron (CVX) and Exxon (XOM) lost ground as Citigroup suggested they were betting too much on a rise in oil prices.
Nonetheless there were some bright spots. U.S. Steel (X) ended the day up more than 10% after its upbeat fourth-quarter report.
Boeing (BA) ended up more than 5% as its fourth quarter overshadowed light guidance.
Stryker (SYK) gained 0.5% on its fourth-quarter beat and Caterpillar (CAT) edged ahead on a tepid endorsement from JPMorgan. |
