Investment Analysis of BP, Shell and Chevron
The paper aims to consider three big oil companies not having significant relationship with the GCC block and evaluate their relative investment potential. This will be pursued by embarking on an analysis of the financials of the company related to earnings and profitability as well as important investor ratios, the management performance and strategic vision laid out from the top and finally recent favorable and adverse public information that has come forth regarding the company to impact the stock price. These three categories will be used to analyze British Petroleum, Royal Dutch Shell and Chevron to ascertain which suitability of investment in short and long run.
Companies Analyzed
British Petroleum
BP is an attractive investment proposition in terms of the dividend payout that it is able to provide. Up till late 2008, the high dividend growth stock has illustrated average rate of return of close to 6.9 since 1997, while EPS annual rise has been 22.8 for a similar period. The ROE has kept within the boundary of 10-29 over the period analyzed while dividends have effectively doubled every ten years (Chaplinski, 2008). The PE ratio of the BP stock is very low while dividend yield has averaged at 5.8 which, despite being lower than previous years, is a substantial point in favor of the stock.
BPs management has illustrated a desire to curb on expansion recently and instead focus on current operations which is favorable for investors as it means less capital expenditure in drilling sites and better profitability. Following operational problems including Prudhoe Bay oil fields being closed for some time, there have been few hiccups for the company which is always a plus sign for share prices of the stock, given managements already declared aim of consolidation as opposed to expansion (Chaplinski, 2008).
One hampering block analysts have pointed out recently is the lack of detail furnished in BPs quarterly reports which allows for significant judgment to be pursued by investors. This is in contrast to what Shell does, providing plethora of information and analysis which informs the investor well about the operations and profitability of the company. However, BP has still managed to cross Shell in terms of market value in Europe recently on the back of prudent cost cutting despite falling oil prices and has capitalized on opportunities to claim strategic strongholds through bidding in Iraq and exploring potential in Russia.
Chevron
Chevron is a high performer in the energy sector based in the United States. It has been able to provide average total return of up to 9.4 on its stockholdings while EPS has seen annual average growth of 25 since 1998. EPS plummeted in 2009 following the downturn in demand but is schedule to rise again. Dividend growth per year has been at an average of 8.3 which has been accompanied by ROE keeping above the 20 level since 2003. The stock has a low PE at 5.6 while yielding four percent but it is higher compared to other firms in the industry, particularly British Petroleum (Dividend Growth Investor, 2009).
Chevrons management has repeatedly pressed the goal to become leading stockholder return provider relative to its competitors. This has been planned via operational improvements and cost reduction mechanisms which are the reason for BPs recent upshot in Europe over Shell. Its record of growth has been strong with the development of fields in Angola and joint ventures with Philips Petroleum. However, the company has faced pressure from varying groups over its record in Nigeria as well as spillages in Ecuador which has taken its toll on share price in 2008 (Chang, 2009).
The company faces fewer opportunities for expansion as reserves are dwindling while competition is stiffening with the known reserves under the control of state owned enterprises. It has struggled to gain entrance into Iraq as well. However, the succession of the new CEO John Watson may alter the perceptions associated with the company of late as it seeks to consolidate its holdings and build upon returns for investors. At present, a shift in strategic planning is necessary (Gelsi, 2009).
Royal Dutch Shell
Shell has been a stronger performer with regards to dividends, being regarded as a growth stock. Its ROE stands at 9.5 while PE ratio has been relatively high compared to competitors at 14. Dividend yield for the company has stuck around the 5.5 mark while it has been able to post consistent dividend growth, even outpacing BP with its announcement of 5 growth to BPs 4. The stable returns allow for Shell to make an attractive stock which was illustrated when earnings figures turned adverse recently in the financial crisis but the stock was still able to post a rise in price, unlike other industries hit by the financial turmoil (Bloomberg, 2010).
Management of the company has expressed desire for expansion upstream and downstream which is consistent with recent price volatility in oil sector, since Shell has been able to post stable long term fundamentals. This is what prompted fewer project initiations in 2008, consistent with cost cutting and consolidation measures while relaying on longer term fruits to add to shareholder value. These forecasts and actions are aided by significantly low debt levels at around 6. Considering the potential for cutting supply chain costs based on the size of Shell and ability to tap on sand tar reserves which become profitable with oil price spikes, the companys future looks secure in times of dwindling expected reserves (Oil Voice 2009).
The company does however face hiccups from human rights groups challenging its record in Niger Delta as well as questions regarding Shells reserves which were moved from proven to probable, sparking comparisons with Enron (Chang, 2009). However, operations remain strong and given the diversification pursued as well as the immense size of the company across multiple continents and potential for consolidation, Shell may be able to pull through the current times and record significant growth in future.
Investment Recommendation
In the short run, BP is a good choice for investment. It has the lowest PE multiple while yield has been high of late. Shell and Chevron have been able to record better average financial performance and fewer hiccups over some portions of the period considered but considering the cost cutting and consolidation measures initiated by BP which made it largest in market value in Europe over Shell after three years and the potential for greater profitability with such a strategy, the BP stock will accord better returns in the short term for any investor (Lynch, 2009). If a very long run perspective has to be taken, Royal Dutch Shell is a good option due to strong long term fundamentals, adequate reserves and ability to engage in supply side cost reductions to boost profits, accompanied by the long term vision of executive management.
The paper aims to consider three big oil companies not having significant relationship with the GCC block and evaluate their relative investment potential. This will be pursued by embarking on an analysis of the financials of the company related to earnings and profitability as well as important investor ratios, the management performance and strategic vision laid out from the top and finally recent favorable and adverse public information that has come forth regarding the company to impact the stock price. These three categories will be used to analyze British Petroleum, Royal Dutch Shell and Chevron to ascertain which suitability of investment in short and long run.
Companies Analyzed
British Petroleum
BP is an attractive investment proposition in terms of the dividend payout that it is able to provide. Up till late 2008, the high dividend growth stock has illustrated average rate of return of close to 6.9 since 1997, while EPS annual rise has been 22.8 for a similar period. The ROE has kept within the boundary of 10-29 over the period analyzed while dividends have effectively doubled every ten years (Chaplinski, 2008). The PE ratio of the BP stock is very low while dividend yield has averaged at 5.8 which, despite being lower than previous years, is a substantial point in favor of the stock.
BPs management has illustrated a desire to curb on expansion recently and instead focus on current operations which is favorable for investors as it means less capital expenditure in drilling sites and better profitability. Following operational problems including Prudhoe Bay oil fields being closed for some time, there have been few hiccups for the company which is always a plus sign for share prices of the stock, given managements already declared aim of consolidation as opposed to expansion (Chaplinski, 2008).
One hampering block analysts have pointed out recently is the lack of detail furnished in BPs quarterly reports which allows for significant judgment to be pursued by investors. This is in contrast to what Shell does, providing plethora of information and analysis which informs the investor well about the operations and profitability of the company. However, BP has still managed to cross Shell in terms of market value in Europe recently on the back of prudent cost cutting despite falling oil prices and has capitalized on opportunities to claim strategic strongholds through bidding in Iraq and exploring potential in Russia.
Chevron
Chevron is a high performer in the energy sector based in the United States. It has been able to provide average total return of up to 9.4 on its stockholdings while EPS has seen annual average growth of 25 since 1998. EPS plummeted in 2009 following the downturn in demand but is schedule to rise again. Dividend growth per year has been at an average of 8.3 which has been accompanied by ROE keeping above the 20 level since 2003. The stock has a low PE at 5.6 while yielding four percent but it is higher compared to other firms in the industry, particularly British Petroleum (Dividend Growth Investor, 2009).
Chevrons management has repeatedly pressed the goal to become leading stockholder return provider relative to its competitors. This has been planned via operational improvements and cost reduction mechanisms which are the reason for BPs recent upshot in Europe over Shell. Its record of growth has been strong with the development of fields in Angola and joint ventures with Philips Petroleum. However, the company has faced pressure from varying groups over its record in Nigeria as well as spillages in Ecuador which has taken its toll on share price in 2008 (Chang, 2009).
The company faces fewer opportunities for expansion as reserves are dwindling while competition is stiffening with the known reserves under the control of state owned enterprises. It has struggled to gain entrance into Iraq as well. However, the succession of the new CEO John Watson may alter the perceptions associated with the company of late as it seeks to consolidate its holdings and build upon returns for investors. At present, a shift in strategic planning is necessary (Gelsi, 2009).
Royal Dutch Shell
Shell has been a stronger performer with regards to dividends, being regarded as a growth stock. Its ROE stands at 9.5 while PE ratio has been relatively high compared to competitors at 14. Dividend yield for the company has stuck around the 5.5 mark while it has been able to post consistent dividend growth, even outpacing BP with its announcement of 5 growth to BPs 4. The stable returns allow for Shell to make an attractive stock which was illustrated when earnings figures turned adverse recently in the financial crisis but the stock was still able to post a rise in price, unlike other industries hit by the financial turmoil (Bloomberg, 2010).
Management of the company has expressed desire for expansion upstream and downstream which is consistent with recent price volatility in oil sector, since Shell has been able to post stable long term fundamentals. This is what prompted fewer project initiations in 2008, consistent with cost cutting and consolidation measures while relaying on longer term fruits to add to shareholder value. These forecasts and actions are aided by significantly low debt levels at around 6. Considering the potential for cutting supply chain costs based on the size of Shell and ability to tap on sand tar reserves which become profitable with oil price spikes, the companys future looks secure in times of dwindling expected reserves (Oil Voice 2009).
The company does however face hiccups from human rights groups challenging its record in Niger Delta as well as questions regarding Shells reserves which were moved from proven to probable, sparking comparisons with Enron (Chang, 2009). However, operations remain strong and given the diversification pursued as well as the immense size of the company across multiple continents and potential for consolidation, Shell may be able to pull through the current times and record significant growth in future.
Investment Recommendation
In the short run, BP is a good choice for investment. It has the lowest PE multiple while yield has been high of late. Shell and Chevron have been able to record better average financial performance and fewer hiccups over some portions of the period considered but considering the cost cutting and consolidation measures initiated by BP which made it largest in market value in Europe over Shell after three years and the potential for greater profitability with such a strategy, the BP stock will accord better returns in the short term for any investor (Lynch, 2009). If a very long run perspective has to be taken, Royal Dutch Shell is a good option due to strong long term fundamentals, adequate reserves and ability to engage in supply side cost reductions to boost profits, accompanied by the long term vision of executive management.
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