This is one reason that the market has awarded higher P/Es to the independents than to the majors.
Kistler says that investors fear further stock-price declines if there is permanent "demand destruction" in the U.S., in reaction to high fuel costs.
Independents like Anadarko, Devon Energy and XTO have come down hard because they get most or nearly all their revenue from natural gas, which could be more vulnerable than oil, thanks to rising domestic production. There's no way to export sizable amounts of gas, so high production can slam prices. Kistler says the stocks should rally if oil and gas prices hold at current levels.
It's probably cheaper to buy energy reserves on the New York Stock Exchange than to drill for them, given sharply higher finding costs and the risks of dry holes. This could prompt a new wave of takeovers if the independents' share prices don't bounce back.
Anadarko and Devon are viewed as prime targets. Anadarko, which has grown through acquisitions, is considered receptive to a takeover. And Devon, headed by longtime CEO Larry Nichols, 66, finally may be willing to deal. XTO is viewed as an unlikely seller because CEO Bob Simpson, 60, seems intent on creating the largest domestic natural-gas producer.
THE MAJORS BECKON, given their low P/Es, strong balance sheets and diversified business mixes that involve energy production, refining and chemicals. Exxon has $30 billion in net cash (cash less debt) and is likely to produce almost $50 billion of after-tax profit this year. One potential plus for the majors next year is that refining margins, which have collapsed, could reverse.
A legitimate knock on the U.S. majors is that they're stingy with dividends, paying out just a fraction of their profits and opting instead to earmark much of their earnings for stock buybacks that have done little for their share prices or valuations. Exxon and Conoco yield just 2%; Chevron, 3%. Exxon may buy back $35 billion of stock this year, while paying out $8 billion in dividends. The overly conservative U.S. majors could easily offer 5% dividends and still have ample funds for buybacks. European oil giants like BP and Royal Dutch Shell (RDS-A) have payouts in the 4% to 5% range.
Table: Nothing to Gush OverWhat's ailing the major oils? Exxon grabbed headlines with its second-quarter after-tax profits of $11 billion, a record for any company. Its earnings were deemed obscene by those in Washington who want to revive the 1970s-era windfall profits taxes. Exxon's earnings, however, didn't play as well on Wall Street; analysts noted that they trailed the consensus estimate for the second straight quarter and that Exxon's energy production had fallen 8%.
Some one-time factors hurt Exxon, the largest and best-managed major oil, but even a generous assessment of its production showed a 2% drop.
