Exxon and Chevron are being hurt by so-called production-sharing agreements with the governments of the foreign lands from which they pump oil and gas.
These largely undisclosed accords, involving nations such as Angola, typically limit the Western oil companies' returns and production after their initial investments are recouped. Given high oil prices, these agreements are quickly putting the host countries in the driver's seat. In a recent research note, Oppenheimer analyst Fadel Gheit wrote that "high oil prices are not good for Exxon's business as they increase government take in royalties and taxes, strengthen national oil companies, limit access to resources, but, above all, depress the share price." Gheit may exaggerate the impact; only about 20% of Exxon's output is subject to production-sharing agreements, and the company did enjoy a sharp rise in second-quarter earnings. In any case, the problems seem well-discounted in Exxon's share price.
Still, the overriding fear in the investment community is that the international oil giants will have a tough time maintaining production levels, given less-favorable international operating conditions. At current valuations, they're being treated like wasting assets.
Paul Cheng, Lehman Brothers' energy analyst, is a fan of Chevron because of its low valuation. It recently was trading at 83, just 6.6 times projected 2008 profits of $12.70 a share. Cheng expects the company to be able to boost output by 4% in 2009 and 2010, according to a recent note. Wall Street seems wary of Chevron because much of its production growth is coming from potential trouble spots overseas, including Nigeria, Kazakhstan and Angola. Conoco, whose shares, at 80, trade at a rock-bottom six times projected 2008 earnings, has less international exposure than Chevron and Exxon, but that hasn't helped its valuation.
The Bottom Line
Based on the major energy companies' prospects and valuations, their shares are trading at levels that make them look like bargains for long-term investors.Canadian energy producers also have fallen sharply, including oil-sands operators like Suncor (SU) and Canadian Natural Resources (CNQ).
Shares of Suncor, the most prominent oil-sands play, have slid to about 50 from 74 in May, hurt by lower crude prices and disappointing production. But Suncor's daily output should rise sharply in the next year, and its shares now are at a reasonable 8.5 times next year's estimated earnings. In recent years, Suncor has consistently traded at a P/E premium to other major oil companies because it has enormous reserves that may last a century, against the 10 to 20 years for the major international oils. This is a huge advantage.
Among U.S. independents, XTO has been particularly hard hit on Wall Street, with its stock tumbling to the mid-40s from a June peak of 73, as investors fret over declining gas prices and the company's $10 billion acquisition spree this year. But over the past 22 years under Simpson's leadership, XTO has become a leading U.S. natural-gas producer, with excellent drilling results, low finding costs and shrewd acquisitions.
At a recent 45, XTO was valued at 10 times projected 2008 profits and at less than $2.50 per thousand cubic feet of reserves. The company has long traded at a premium to its peers, based on earnings, cash flow and reserves, but that premium has disappeared.
Given such valuations, it seems tough to go wrong now with XTO or almost any major energy stock, even if energy prices fall a little further.
