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Shell Company

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Royal Dutch Shell PLC RDS.A
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|by Elizabeth Collins |
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|Analyst Note 07-31-2008 |
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|Royal Dutch Shell RDS.A reported second-quarter results Thursday. Net income rose to $11.6 billion, up 33% from $8.7 billion in the second quarter of 2007. In the |
|exploration and production segment, liquid prices increased 74% and natural-gas prices increased 54%, while total oil and gas production fell 1%, to 3.054 million |
|barrels of oil equivalent per day. These factors drove a 90% increase in upstream earnings. Shell's downstream oil product segment suffered from lower realized |
|gross refining margins and higher operating costs. The company is continuing its massive capital program; it invested $8.0 billion in the second quarter. |
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|Thesis 05-16-2008 |
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|In the wake of large downward reserves revisions, Shell has seen its competitive position weaken. However, it remains an attractive business, thanks to strong |
|company fundamentals. |
|In 2004, Shell stunned investors with a sharp downward revision to its proved oil and gas reserves, ultimately slashing the figure by one third. The incident |
|highlighted fundamental weakness in the firm's most profitable segment, exploration and production. In light of the revised data, Shell's reserve life index (the |
|ratio of proved reserves to annual production) sits just under 10 years. Further, production has declined steadily over the last several years. In the years to |
|come, as the firm replaces depleted reserves, it faces an uphill battle relative to some of its peers. |
|Shell has emerged from the incident bruised but not beaten. To restore investor confidence, management attacked weak internal controls, revamped the compensation |
|scheme, and simplified and centralized the organizational structure. Management also responded with a strategy designed to regain lost ground, which we think can |
|work, albeit gradually. The objective is to rebuild the resource base and expand the upstream segment. To do this, Shell needs to commit to a prolonged period of |
|heightened investment. With increased emphasis on gas, unconventional oil, and massive, complex projects, Shell has increased exploration and development spending |
|and is targeting production growth in politically and geologically challenging areas like Russia, West Africa, and the Middle East. |
|Shell is not alone in facing challenges to profitable upstream growth. With higher energy prices, international oil companies are battling stiffer terms from |
|resource-holding countries; an increasing number of worthy competitors with the necessary capital, technological, and commercial resources; and escalating costs. |
|Further, refining bottlenecks appear to be easing and gasoline and diesel demand could suffer in a weakening economy, leading to weaker refining margins than we've |
|seen in the recent past. |
|Nonetheless, we expect Shell to continue generating solid returns. Despite the reserves setback, Shell benefits from huge economies of scale, has made progress with|
|cost-cutting initiatives in recent years, and has not had an unprofitable year in decades. Further, few competitors can rival Shell's technology and engineering |
|expertise, project management skills, or capital resources. These capabilities will help the firm as it pursues more-complex energy projects. |
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|Valuation |
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|We're raising our fair value estimate to $93 from $87 per share, based on our higher oil and natural-gas price assumptions. In our discounted cash-flow model, our |
|benchmark oil and gas prices are based on NYMEX futures contracts for 2008-10. For natural gas, we are currently using $11 per thousand cubic feet (mcf) in 2008, |
|$11 in 2009, and $10 in 2010. For oil, we are currently using $117 per barrel in 2008, $122 in 2009, and $120 in 2010. Our forecast includes elevated capital |
|expenditures over the next several years, and we assume that production levels will decline due to any number of factors, including violence and funding problems in|
|Nigeria, project delays in the oil sands of Canada, or delays at the Kashagan oil field. Further, our model incorporates weaker downstream profitability relative to|
|recent years. |
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|Risk |
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|We place Shell in our low uncertainty bucket, although it faces greater uncertainties and challenges than many of the other companies in this category. The largest |
|risk is a sustained downturn in commodity prices caused by oversupply or a drastic reduction in demand brought on by recession or technology advances. Political |
|risk in the form of war, eviction from a country, or higher taxes is rising as Shell sources more of its production in less-stable areas. The risk of spills and |
|other environmental problems is also ever present. Still, Shell's massive size, diversity, and century-long record of navigating through difficult challenges lead |
|us to believe the firm will continue to generate solid returns. |
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|See Previous Analyst Reports |
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|Close Competitors |
|TTM Sales $Mil |
|Market Cap $Mil |
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|Royal Dutch Shell PLC |
|396,604 |
|138,801 |
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|* |
|ExxonMobil Corporation |
|472,318 |
|323,898 |
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|* |
|BP PLC |
|318,625 |
|146,750 |
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|* |
|Chevron Corporation |
|265,879 |
|143,587 |
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|* |
|Total SA |
|195,463 |
|110,674 |
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|* |
|Morningstar Analyst Report Available | Compare These Stocks |
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|Data as of 06-30-08 |
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|Strategy |
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|By not participating in the megamerger game, Shell lost its spot as the world's largest energy company. Now, instead of licking its wounds following the reserves |
|restatements, Shell is bent on rebuilding its resource base and expanding its upstream exploration and production business through heavy investment and, in our |
|view, possibly acquisitions. Targeted growth areas include resources in politically challenging spots like Russia, West Africa, and the Middle East as well as |
|unconventional oil and gas. The firm is emphasizing the natural-gas side of the business and has a leading stake in the global liquefied natural-gas market. |
|Downstream, Shell is focusing on profitability metrics while planning to increasingly tap the fast-growing Asian market. |
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|Management & Stewardship |
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|Shell's reserves debacle brought to light serious stewardship gaps that the company is earnestly trying to remedy by overhauling management systems. For the past |
|century, Royal Dutch and Shell Transport had jointly appointed directors to the Shell board and rotated the chairmanship among representatives of the two parent |
|firms. In July 2005, these two holding companies merged into a single entity. Triggered by Shell's reserves issues, the change should simplify the management |
|structure, streamline decision-making, and increase accountability. We're pleased to see that the firm is also revamping its remuneration policies, eliminating the |
|use of stock options and creating long-term incentive plans that better align the interests of management and shareholders. We think the changes will be effective |
|at restoring investor confidence, but new systems and processes will take time to implement and become effective. The new firm is headed by CEO Jeroen van der Veer,|
|who was chief executive of Royal Dutch/Shell Group and a nonexecutive chairman. Van der Veer joined the group in 1971 and has been a managing director since 1997. |
|In our view, he has done an effective job steering Shell's ship since the departure of former chairman Philip Watts, who was ousted following the reserves |
|write-down. |
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|Profile |
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|Royal Dutch Shell's global integrated operations cover the spectrum in oil and gas. Shell is considered a supermajor, along with ExxonMobil and BP. Royal Dutch |
|Shell has almost 12 billion barrels of proved oil and gas reserves, daily production of 3.3 million barrels of oil equivalent, the capacity to refine 4 million |
|barrels a day, and about 46,000 service stations. Other businesses include chemicals and liquefied natural-gas infrastructure. |
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|Growth |
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|Revenue grows and contracts in spurts because of dependence on volatile commodity prices. Oil and gas production levels could decline slightly over the next several|
|years, as Shell faces declining production in mature fields and uncertainties in Nigeria. |
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|Profitability |
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|For years, Shell has been creating solid but unspectacular profitability. Currently, strong energy prices are helping the firm rack up impressive returns. Longer |
|term, we think Shell should continue to generate solid economic profits. |
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|Financial Health |
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|Although it still has one of the industry's healthiest balance sheets, Shell saw its credit rating reduced from AAA to AA following the reserves restatements. The |
|firm has no liquidity concerns, however. A large cash balance, debt well below its targeted range, and strong free cash flows keep Shell in good financial shape. |
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|Morningstar Rating [pic] |
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|[pic]***** |
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|Stock Price |
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|As of 07-31-2008 |
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|$70.79 |
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|Fair Value Estimate |
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|$93.00 |
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|Consider Buying [pic] |
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|$74.40 |
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|Consider Selling [pic] |
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|$116.30 |
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|Video Reports |
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|[pic][pic]Oil Majors Overlooked by the Market |
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|More Videos... |
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|Fair Value Uncertainty [pic] |
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|Low |
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|Economic Moat [pic] |
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|Narrow |
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|Stewardship Grade [pic] |
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|NA |
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|Analyst Note |
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|Shell Nets $11.6 Billion in 2Q |
|Elizabeth Collins 07-31-2008 |
|See All Notes |
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|Bulls Say |
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|In an industry where size matters, Shell is one of the world's three largest nongovernmental integrated oil companies and has the largest retail distribution |
|network. |
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|A world leader in the growing liquefied natural-gas market, Shell has major LNG projects in Africa, the Middle East, and Asia. |
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|Shell has a very healthy balance sheet, generates lots of cash, and is returning much of this cash to shareholders through dividends and share buybacks. |
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|Shell's size and cost structure make the firm an attractive partner for emerging international production projects. |
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|Bears Say |
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|Multiple reserve restatements have left Shell with far less proved reserves than its larger peers and highlight fundamental weaknesses in the company's upstream |
|business. |
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|In light of the reserves restatements, Shell has replaced only a fraction of its production with new reserves over the past five years. |
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|Given poor performance in exploration and production, Shell needs to increase capital spending substantially to keep long-term growth on track. |
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|To increase production, Shell is boosting exposure to less politically friendly places like Russia, West Africa, and the Middle East. |
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|Shell missed the major merger party several years ago. Today, acquisition targets are much pricier and the pickings are slimmer. |
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|Recommended Readings |
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|Home Page |
|Royal Dutch Shell |
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|Sakhalin Energy |
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|ExxonMobil Corporation XOM |
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|by Allen Good |
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|Thesis 09-16-2008 |
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|Exxon led the industry with record profits as commodity prices soared, but the real value comes from the company’s operational excellence, which drove performance |
|and distinguished the company from its peers. With commodity prices potentially stabilizing, it will be up to management to capitalize on its superior operational |
|abilities to overcome the head winds of resource nationalism and reserve scarcity to increase production and deliver profits. |
|Exxon's hallmark is a relentless pursuit of efficiency, technology, development, and operational improvement, all of which have contributed to its consistently |
|higher returns on capital relative to peers. By regularly completing projects early, the company has reduced costs, realized production gains sooner, and possibly |
|most importantly, demonstrated its worthiness as a partner. Higher commodity prices have sparked a bout of resource nationalism whereby countries rich in oil and |
|gas reserves have been less willing to allow outside energy companies free range to exploit resources within their borders. Instead, they look for dependable |
|partners to work with their national oil companies, or NOCs, to explore for, produce, and transport to market their oil and gas reserves. In our opinion, they |
|cannot find a better partner than Exxon. With its deep pockets, expertise, and integrated operations it can tackle nearly any megaproject regardless of scale, |
|location, or operational difficulty. |
|We believe no other super-major integrated energy company is better suited for the current environment than Exxon. However, that does not necessarily mean |
|production and reserve gains will come easily for the company. Exxon's global scope of operations means it evaluates projects and allocates capital on a worldwide |
|scale, not limiting itself to one geographic area. With this approach, only the most attractive projects merit investment. At the same time, projects must be of a |
|certain size in order to contribute meaningfully to Exxon’s production profile. Investing exclusively in large projects opens the firm to potential overinvestment |
|risk if commodity prices crash and cost overruns if projects fail to deliver on time. Also, clashes between national oil companies and Exxon could occur if they |
|fail to agree on acceptable production-sharing agreements. Meanwhile, competitors eager for access may be more willingly agree to the NOCs' less-favorable terms. |
|More often, management is faced with a tough decision: take less-favorable terms on more projects or focus on projects where its expertise is highly valued by the |
|NOC and/or pursue frontier locations such as the Arctic. |
|Upstream operations alone do not determine Exxon's future; a significant portion of the company's value comes from its downstream and chemical operations. While |
|generally considered lower quality than the upstream operations, Exxon's emphasis on integration between the segments creates value through the size and scale of |
|operations. The expansive geographic footprint of the refining business inoculates it from regional weakness in refining margins, allows sourcing of the most |
|cost-advantageous crudes for feedstock, and offers access to growing markets. Its chemical products portfolio enjoys dominant market share positions and |
|diversification, distinguishing it from many of its competitors. |
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|Valuation |
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|We are reducing our fair value estimate for Exxon to $99 from $106. The estimate reflects the most recent revisions to our oil and natural gas price assumptions. |
|Currently, our discounted cash-flow model reflects NYMEX crude oil futures prices of $112 per barrel in 2008, $109 in 2009 and $110 in 2010. Prices used for |
|natural-gas are $9.30 per thousand cubic feet (mcf) in 2008, $8.60 in 2009 and $9 in 2010. While short-term oil and gas prices may vary, the impact on Exxon’s |
|valuation is lower than other nonintegrated firms in the oil and gas industry because of the size and variety of their businesses. Exxon should realize significant |
|revenue growth because of commodity price increases, but we also anticipate increased production costs reducing margins. Since we see the company taking on larger |
|projects in more difficult environments, the model includes higher-than-historical-production costs per barrel. Also we anticipate reduced refining margins as |
|economic weakness spreads throughout the global economy, reducing near-term demand. Total hydrocarbon production growth for the exploration and production segment |
|is modeled at roughly 5% for 2007 through 2012. Exxon's larger projects mean lumpier growth. The chemicals segment should provide steady earnings but could be |
|harmed in the short term if the economy weakens and margins compress. |
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|Risk |
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|For a company that has global operations, geopolitical risk is always an issue. Recent events in Russia, Nigeria, and Venezuela demonstrate the risk associated with|
|doing business in those countries. These risks will only become greater as Exxon expands its global production portfolio through partnerships with NOCs. By |
|investing in large capital intensive projects, Exxon also runs the risk that commodity prices will decrease dramatically, making those projects no longer |
|economical. Over the short term, Exxon's extensive refining operations are in danger of seeing economic weakness spreading globally, reducing demand and compressing|
|margins. |
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|See Previous Analyst Reports |
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|Close Competitors |
|TTM Sales $Mil |
|Market Cap $Mil |
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|ExxonMobil Corporation |
|472,318 |
|323,898 |
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|* |
|BP PLC |
|318,625 |
|146,750 |
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|* |
|Royal Dutch Shell PLC |
|396,604 |
|138,801 |
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|* |
|Chevron Corporation |
|265,879 |
|143,587 |
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|* |
|Total SA |
|195,463 |
|110,674 |
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|* |
|Morningstar Analyst Report Available | Compare These Stocks |
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|Data as of 03-31-08 |
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|Strategy |
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|Exxon can attribute much of its returns to selective capital allocation and project execution. Management will continue to evaluate projects on a global basis to |
|determine how they can be integrated with current operations before making any investments. To boost production, the company will focus on large projects where they|
|can use their expertise, best practices, and technologies to deliver production on time. Specific projects include liquified natural gas, or LNG, trains in Qatar to|
|take advantage of a expanding global natural gas markets and deep-water drilling in Western Africa. |
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|Management & Stewardship |
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|Rex Tillerson is chairman and CEO of Exxon, a role he assumed in 2006. Previously, he served as president of the corporation after spending his career with Exxon |
|beginning in 1975 as a production engineer. Tillerson is likely to continue a disciplined capital allocation strategy and deliver the high returns that his |
|predecessor did. Total compensation for Tillerson was only $16 million in 2007, which is reasonable, considering the size of the company and his peers' |
|compensation. Exxon has a typical compensation structure consisting of a salary, cash bonus, and equity awards. Performance is not evaluated by typical quantitative|
|measures but by the executives' performance relative to achievement of the company's long-term goals. Exxon gets credit for delaying 50% of bonus payment until |
|later periods' earnings targets are met and requiring longer vesting periods for equity awards. Low executive equity ownership relative to total shares outstanding |
|is understandable, considering the size and history of the company. |
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|Profile |
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|Exxon is the world's largest integrated oil and gas company participating in almost every industry activity. It explores for resources globally and, in 2007, |
|produced 2.5 million barrels of oil and 9.4 million cubic feet of natural gas a day. The company operates 38 refineries, making it the largest refiner, marketer, |
|and supplier of petroleum products and manufacturer of lube basestocks. It is also one of the world’s largest manufacturers of commodity and specialty chemicals. |
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|Growth |
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|Commodity price increases primarily drove the increases in revenue the past five years, as production has essentially remained flat. Despite adding production and |
|replacing reserves, the company is dealing with a large mature production base declining at 5% to 6% per year. Future production growth will likely be lumpy, as |
|gains will be from large projects coming online. |
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|Profitability |
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|High crude oil prices made record profits at Exxon the norm recently. Combining its operational efficiencies with high commodity prices, Exxon delivered returns on |
|capital that outpaced its competitors. Regardless of the future path of oil prices, Exxon should be able to deliver industry-leading profits. However, potentially |
|lower production numbers and higher costs may crimp margins. |
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|Financial Health |
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|With $39 billion in cash, a debt-to-capital ratio of 7%, and a AAA credit rating, Exxon's financial health is beyond reproach. Cash flow from operations is more |
|than sufficient to finance capital expenditure needs while increasing dividend payments and buying back $8 billion in stock a quarter. More importantly, the large |
|cash position and access to cheap debt give the company resources to make any opportune acquisitions. |
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|Morningstar Rating [pic] |
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|[pic]***** |
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|Stock Price |
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|As of 09-16-2008 |
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|$76.43 |
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|Fair Value Estimate |
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|$99.00 |
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|Consider Buying [pic] |
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|$79.20 |
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|Consider Selling [pic] |
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|$123.80 |
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|Video Reports |
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|[pic][pic]Places to Invest Amid the Oil & Gas Slide |
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|More Videos... |
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|Fair Value Uncertainty [pic] |
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|Low |
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|Economic Moat [pic] |
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|Wide |
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|Stewardship Grade [pic] |
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|B |
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|Analyst Note |
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|First Impression of Exxon's Earnings |
|Justin Perucki, CFA 07-31-2008 |
|See All Notes |
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|Bulls Say |
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|Exxon's superior capital allocation and operational performance should drive high returns on capital in the future. |
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|NOCs do not have the resources or expertise to effectively explore for and produce oil and gas in their countries. They will need to partner with private firms, and|
|Exxon is the most attractive option. |
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|With high-performing operations and global integration, Exxon is one of the best-positioned firms to weather a drop in commodity prices. The diversity of its |
|operations and a vast geographic footprint offer protection against regional economic weakness. |
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|Shareholder return is a focus of management as over the past five years. Exxon paid $36 billion in dividends and repurchased $82 billion worth of stock, reducing |
|shares outstanding by 20%. |
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|Bears Say |
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|The company will find it increasingly difficult to increase production and book reserves as nations become more protective of their natural resources. |
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|Record-high commodity prices helped produced record profits. If commodity prices slip, so will profits. |
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|Exxon is very discriminating when evaluating investment opportunities. They are unlikely to sign lesa-favorable contracts, which could slow growth. |
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|Production growth will come from partnerships with NOCs, politically unstable countries, and difficult environments, which means unfavorable production sharing |
|agreements, increased geopolitical risks, and increased production costs. |
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|Recommended Readings |
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|Exxon's Homepage |
|Exxon |
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|BP PLC BP |
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|by Elizabeth Collins |
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|Analyst Note 09-02-2008 | by Morningstar Analysts |
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|On the heels of its recent Haynesville Shale joint venture with Plains Exploration PXP, Chesapeake Energy CHK has agreed to a similar partnership with BP BP for its|
|Fayetteville Shale assets. BP will pay $1.9 billion for a 25% interest in Chesapeake's assets in the region, giving BP another play to go with the Woodford Shale |
|assets it bought outright from Chesapeake in July. North American natural gas has grown increasingly attractive to majors who have been starved for opportunities |
|elsewhere in the world, especially since technological improvements have increased the scalability of shale gas. The majors' limited capital reinvestment has also |
|resulted in clean, flexible balance sheets with which to pursue deals. |
|The transaction is part of Chesapeake's strategy of asset monetization, which allows the company to immediately capture value from its portfolio while also |
|offloading some of the risk. Chesapeake has said it's exploring similar options for its Marcellus Shale properties and will likely continue to funnel proceeds back |
|into its aggressive leasehold acquisition program. |
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|Thesis 08-13-2008 | by Elizabeth Collins |
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|Historically, BP has focused on assembling a portfolio of topnotch assets, including high-potential oil and gas fields and advantaged refineries. The firm has paid |
|less attention to the operation of its assets, which has resulted in accidents and depressed financial results. With a new CEO in place, BP is changing course and |
|looks set to spend the next several years on operational improvements. If successful, this should allow the firm to take full advantage of its attractive assets. |
|Compared with peers ExxonMobil [pic]XOM and Royal Dutch Shell [pic]RDS.A, exploration and production makes up a larger chunk of BP's business. We think most E&P |
|operations enjoy an economic moat because OPEC helps maintain industrywide profitability. BP is no exception. Plus, the firm's enormous size and capabilities allow |
|it to pursue projects that are risky but have the potential for huge rewards. |
|BP has several challenges ahead. In its quest to aggressively increase oil and gas production, the firm will be partnering with foreign governments and national oil|
|companies in politically unstable regions. Although BP's capital resources and technological expertise make it a valuable partner, the upper hand often goes to the |
|foreign governments because they have what matters most: oil and gas resources. BP could find it increasingly difficult to secure production agreements on favorable|
|terms. |
|A political risk worth highlighting is BP's exposure to Russia. More than one third of BP's oil production comes from its share of TNK-BP, a leading Russian oil |
|producer. No other supermajor is this dependent on Russian energy. Russia has become notorious for using its vast resources as a political weapon. The dismantling |
|in 2004 of leading Russian oil producer Yukos, plus TNK-BP's own experiences with surprise back-tax bills and a coerced divestiture, does nothing to bolster our |
|confidence for BP's investments in this country. Still, BP's strategy of applying technology and management savvy to Russia's enormous resources could bring |
|handsome rewards. |
|BP is not alone in facing challenges to profitable upstream growth. With higher energy prices, international oil companies are battling stiffer terms from |
|resource-holding countries; an increasing number of worthy competitors with the necessary capital, technological, and commercial resources; and escalating costs. |
|Further, refining bottlenecks appear to be easing, and gasoline and diesel demand could suffer in a weakening economy, leading to lower refining margins than we've |
|seen in the recent past. |
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|Valuation |
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|We're lowering our fair value estimate to $87 per share from $89, based on a higher forecast for capital expenditures. In our discounted cash-flow model, our |
|benchmark oil and gas prices are based on NYMEX futures contracts for 2008-10. For natural gas, we are currently using $9.80 per thousand cubic feet (mcf) in 2008, |
|$9.60 in 2009, and $9.60 in 2010. For oil, we are currently using $117 per barrel in 2008, $122 in 2009, and $120 in 2010. Our model incorporates production |
|increases of more than 1% per year for the next few years, with 2012 production of roughly 4 million barrels of oil equivalent per day. Refining revenue is driven |
|largely by product prices and how much crude oil is processed into end products such as gasoline, fuel oil, and jet fuel. We expect refining volume to get a boost |
|as the Texas City refinery comes back on line after an explosion and a hurricane-related shutdown during 2005. After that, we project minimal refining volume |
|increases. |
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|Risk |
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|Our valuation of BP entails greater uncertainty than our valuations for ExxonMobil and Shell because BP's business model is less integrated and it has heavy |
|exposure to Russia. As with all oil and gas firms, a sustained drop in oil and gas prices is one of the biggest risks BP faces. Lately, the company has been plagued|
|by mishaps at its North American operations. Potential oil spills and environmental concerns are always issues for the industry, as are political conflicts that |
|could disrupt operations. |
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|See Previous Analyst Reports |
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|Close Competitors |
|TTM Sales $Mil |
|Market Cap $Mil |
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|BP PLC |
|318,625 |
|146,750 |
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|* |
|ExxonMobil Corporation |
|472,318 |
|323,898 |
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|* |
|Royal Dutch Shell PLC |
|396,604 |
|138,801 |
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|* |
|Total SA |
|195,463 |
|110,674 |
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|* |
|Chevron Corporation |
|265,879 |
|143,587 |
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|* |
|Morningstar Analyst Report Available | Compare These Stocks |
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|Data as of 06-30-08 |
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|Strategy |
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|To boost profits, BP seeks to leverage its scale through expanding production and trimming unit costs. After a long period of mergers, acquisitions, and |
|consolidation, BP is now focused on generating growth internally. The firm is looking to its TNK-BP venture in Russia to support long-term growth, but it is also |
|focusing on key project areas including the Asia-Pacific region, Azerbaijan, Algeria, Angola, Trinidad, and the deep-water Gulf of Mexico. |
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|Management & Stewardship |
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|Tony Hayward became group chief executive of BP in May 2007, taking over from John Browne. Hayward was previously chief executive officer of BP's E&P segment, |
|having joined the company in 1982. The past few years have been troubling ones for BP--the firm has been plagued by a massive refinery explosion, pipeline leaks, |
|refinery shutdowns, and major project delays. Hayward will be focusing on improving BP's operational performance. There have also been management changes in BP's |
|North American operations, and BP is increasing spending on safety and maintenance. Peter Sutherland is BP's nonexecutive chairman of the board, a position he's |
|held since 1997. During 2007, BP bought back $7.5 billion worth of shares and paid $8.1 billion in dividends. |
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|Profile |
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|London-based BP is one of the largest international oil companies on the planet, along with ExxonMobil and Royal Dutch Shell. Formed by the 1998 merger of British |
|Petroleum and Amoco, BP boasts proven reserves of 17.8 billion barrels of oil equivalent; in 2007, it produced 3.8 million barrels per day. BP has refining capacity|
|of 2.8 million barrels per day, operates petrochemical plants, and sells petroleum through 24,100 service stations around the globe. |
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|Growth |
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|Revenue growth will depend on prices for oil, natural gas, and petroleum products, in addition to oil and gas production levels and refining output. In the short |
|run, production levels will depend on BP's ability to bring projects on line and maintain output at existing fields. In the long run, production will depend on BP's|
|ability to acquire, discover, and develop additional resources. We expect BP to post modest growth in both oil and gas production and refining activity during the |
|next several years. |
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|Profitability |
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|Profitability will depend on BP's ability to fully utilize its assets as well as operating and capital costs. BP is combating rising industrywide costs for people, |
|equipment, and resources. Longer term, we expect some of these cost pressures to abate. |
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|Financial Health |
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|As a result of decades of profitability, BP has a nominal amount of debt for a company its size. This is the case even as it has been paying out a healthy dividend |
|and repurchasing shares. |
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|Morningstar Rating [pic] |
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|[pic] |
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|Stock Price |
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|As of 09-02-2008 |
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|$54.01 |
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|Fair Value Estimate |
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|$87.00 |
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|Consider Buying [pic] |
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|$60.90 |
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|Consider Selling [pic] |
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|$121.80 |
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|Video Reports |
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|[pic][pic]Oil Majors Overlooked by the Market |
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|More Videos... |
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|Fair Value Uncertainty [pic] |
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|Medium |
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|Economic Moat [pic] |
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|Narrow |
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|Stewardship Grade [pic] |
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|NA |
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|Analyst Note |
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|Chesapeake, BP Announce Venture |
|Morningstar Analysts 09-02-2008 |
|See All Notes |
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|Bulls Say |
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|[pic] |
|We like BP's focus on oil and gas exploration and production. Of integrated energy firms' activities, we think E&P offers the best prospects for strong returns. |
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|[pic] |
|BP has a very healthy project portfolio. Hefty investment in liquefied natural gas and deep-water oil and gas projects should pay off handsomely. BP has also |
|ditched the least profitable portion of its chemical business, demonstrating its desire to trim some fat. |
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|[pic] |
|BP's level of financial and operational disclosure stands out from its peers and highlights the company's efforts at transparency. |
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|Bears Say |
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|[pic] |
|BP has already been burned once in Russia, but it is plowing ahead and spending billions on its partnership there. Recent events--like the dismantling of Yukos as |
|well as surprise back-tax bills--demonstrate that political risk in Russia remains high. |
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|[pic] |
|Russian reserves are plentiful, but much of these hydrocarbons are stranded until new infrastructure gets built. Significant transportation bottlenecks and higher |
|tax rates also decrease their value. |
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|[pic] |
|Environmental, political, and commodity price risks are always present in the oil and gas industry. BP's production in OPEC member countries might be periodically |
|curbed. |
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|[pic] |
|BP's safety and compliance record has come under scrutiny recently after incidents such as the Texas City refinery explosion, pipeline leaks in Alaska as a result |
|of corrosion, and price-manipulation investigations. |
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|Recommended Readings |
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|Home Page |
|BP |
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|Chevron Corporation CVX |
|[pic][pic][pic][pic][pic] |
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|[pic][pic] |
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|[pic] |
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|[pic][pic] |
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|[pic] |
|[pic] |
|[pic] |
|[pic] |
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|[pic][pic] |
|by Allen Good |
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|Thesis 08-29-2008 |
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|Chevron should continue to benefit from high crude oil prices in the near term, helping it post record profits. However, the company's ability to increase |
|production and book reserves--which have become more elusive in recent years--is a key driver for longer-term earnings power. Although conditions can change quickly|
|in the refining business, Chevron's domestic refining profitability has suffered recently from high oil prices and weak demand for refined products like gasoline. |
|Historically high oil and natural-gas prices have brought Chevron record profits in recent years while also masking production declines. Despite a major acquisition|
|in 2005 of Unocal, production rates are lower today than they were five years ago. Chevron also finds itself facing a greater degree of competition as higher oil |
|prices have set off a worldwide exploration boom to exploit resources that were once uneconomical and, in the process, bid up equipment, services, and land prices. |
|As a result, production costs have been driven higher, and reserve-replacement opportunities have been limited. |
|Seeking to expand its production and reserves, the company expanded internationally through partnerships with national oil companies and took interests in |
|properties located in politically challenging locations. International assets now account for 68% of production and 72% of proven reserves. Host nations are |
|bolstering their nationally owned or controlled energy companies to put new discoveries into production in an attempt to capture more value for their own country. |
|To gain access to resources, Chevron is often working more closely in concert with these national oil companies, offering extraction expertise while sometimes |
|agreeing to less favorable terms than it has been accustomed to in the past. Also, many of Chevron's projects are located in deep-water areas. These deep-water |
|projects are technically challenging, and they can often incur higher costs and delays before production comes on line. Our valuation hinges on Chevron's ability to|
|realize production from these deep-water projects, as the firm has invested heavily in them while battling declining production in existing fields. |
|While the upstream segment has had its challenges in recent years, Chevron has been able to count on its downstream refining segment to deliver profits during most |
|of that time. However, this has not been the case since late last year when oil prices began to rise dramatically and refined product prices failed to keep pace. |
|Since then, refining margins have suffered and demand for gasoline has waned, particularly in Chevron's key refining market of California (because of acute economic|
|weakness there). We do not expect these trends will change dramatically in the near future. However, conditions can change swiftly in the refining business, and we |
|expect the entire U.S. refining sector to experience continued weaker profitability than it has during the last few years. Refining assets outside the U.S., |
|particularly in Europe and Asia, should provide some support for the business as market fundamentals there have held up better than in the U.S. |
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|Valuation |
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|We are raising our fair value estimate for Chevron to $129 per share. Our estimate reflects the most recent revisions to our oil and natural-gas price assumptions. |
|Currently our discounted cash-flow model reflects NYMEX crude-oil futures prices of $115 per barrel in 2008, $117 in 2009, and $117 in 2010. Prices used for |
|natural-gas are $9.40 per thousand cubic feet (mcf) in 2008, $9 in 2009, and $9 in 2010. Chevron should realize significant revenue growth because of higher |
|commodity prices, but we also anticipate increased production costs reducing margins. Although production has decreased in recent years, increases will be realized |
|as offshore projects come on line and infrastructure investments gain access to stranded gas assets. Firmwide operating margins should also experience pressure from|
|the weakness in U.S. refining margins that we anticipate for the rest of this year and continuing for the next few years. Although we expect it will be lumpy, total|
|hydrocarbon production growth for the exploration and production segment is modeled at compounded annual growth rate of roughly 3% per year until 2010. Income from |
|the Tengizchevroil in Kazakhstan investment should increase net income as it also benefits from higher commodity prices and production increases. |
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|Risk |
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|While clearly tied to commodity prices, Chevron's success still faces a multitude of risks. Although a drop in commodity prices could affect short-term performance,|
|long-term price depreciation would expose the company to overinvestment risk as current projects would see weaker economics. Regardless of commodity prices, these |
|projects are also subject to cost overruns or completion delays. Many of the company's new investments are in politically challenging areas that sometimes have |
|fickle leaders and populations hostile to outside firms. |
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|See Previous Analyst Reports |
| |
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| |
|Close Competitors |
|TTM Sales $Mil |
|Market Cap $Mil |
| |
| |
| |
|Chevron Corporation |
|265,879 |
|143,587 |
| |
| |
|* |
|ExxonMobil Corporation |
|472,318 |
|323,898 |
| |
| |
|* |
|Royal Dutch Shell PLC |
|396,604 |
|138,801 |
| |
| |
|* |
|BP PLC |
|318,625 |
|146,750 |
| |
| |
|* |
|ConocoPhillips |
|232,099 |
|73,300 |
| |
| |
| |
| |
|* |
|Morningstar Analyst Report Available | Compare These Stocks |
| |
| |
| |
|Data as of 06-30-08 |
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|Strategy |
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|Chevron is not taking the declining production rates lightly as it has aggressively set out to identify oil and gas assets which will deliver well into the future. |
|Focus areas include deep-water projects in the Gulf of Mexico and West Africa as well as projects in the Gulf of Thailand and northwest Australia. Gas will also |
|become a greater proportion of the production mix as investments in liquified natural-gas infrastructure, midstream gathering assets, and gas-to-liquid facilities |
|come on line. |
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|Management & Stewardship |
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|David O'Reilly is CEO and chairman of the company, having been elevated to the position in 2000 from his role as vice chairman of the board responsible for |
|worldwide exploration and production where he served since 1998. O'Reilly's ascent to the top job caps a career which began in 1968 with Chevron as a process |
|engineer. During his tenor as CEO he led the merger of Texaco and the acquisition of Unocal to form the second-largest U.S. oil company. Compensation for O'Reilly |
|in 2007 was a generous $31.5 million, but to the company's credit 89% was considered at risk, with 86% at risk for other senior executives. Chevron's compensation |
|structure is standard for the industry with a base salary and bonus paid in cash and long-term awards in stock options and performance shares. Bonuses and stock |
|awards are based on achievement of goals tied to earnings, returns on capital, and total shareholder returns. The company not only gets good marks for tying |
|executive compensation to shareholders' interests, but also requiring minimum share ownership by executives, all of which are currently exceeded. |
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|Profile |
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|Chevron is an integrated energy company with exploration, production, and refining operations worldwide. With production of 2.6 million of barrels of oil equivalent|
|a day, Chevron is the second-largest oil company in the U.S. Refineries are located in the U.S., the U.K., South Africa and throughout Asia for a total refining |
|capacity of more than 2 million barrels of oil a day. Operations also include an extensive retail outlet network, pipeline system, and chemicals business. |
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|Growth |
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|Higher crude oil, natural gas, and retail gasoline prices produced record revenue and profits for the company in the last few years as production actually declined.|
|Future growth will continue to be dependant on commodity prices, while gains in production will result from the success of recent partnerships and discoveries in |
|newer acreage. |
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|Profitability |
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|Chevron delivered record profits as commodity prices climbed to historic levels. The company has delivered returns in excess of its cost of capital for many years, |
|and we expect it will do so in the future. However, as reserves and production become scarcer, costs are likely to increase, depressing margins. |
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|Financial Health |
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|Chevron has a strong balance sheet with a debt/capital ratio of only 8%. Strong cash flow from operations should continue to fund investments and share repurchases |
|while low debt and a large cash balance afford the company financial flexibility. |
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|Morningstar Rating [pic] |
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|[pic]***** |
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|Stock Price |
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|As of 08-29-2008 |
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|$86.32 |
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|Fair Value Estimate |
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|$129.00 |
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|Consider Buying [pic] |
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|$90.30 |
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|Consider Selling [pic] |
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|$180.60 |
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|Video Reports |
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|[pic][pic]Places to Invest Amid the Oil & Gas Slide |
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|More Videos... |
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|Fair Value Uncertainty [pic] |
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|Medium |
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|Economic Moat [pic] |
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|Narrow |
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|Stewardship Grade [pic] |
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|B |
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|Analyst Note |
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|First Impression of Chevron's Earnings |
|Justin Perucki, CFA 08-01-2008 |
|See All Notes |
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|Bulls Say |
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|[pic] |
|The company purchased $4 billion worth of stock the first half of 2008 and should match that amount in the second half of the year. |
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|[pic] |
|Despite variation in short-term energy prices, long-term supply-and-demand factors should sustain a high price environment resulting in returns in excess of capital|
|costs. |
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|[pic] |
|Chevron is investing heavily in worldwide exploration projects, which should lead to reserves and production in the near future. |
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|[pic] |
|Significant ownership of refineries in Asia offer access to growth markets and offset suffering U.S. refining margins. |
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|[pic] |
|Investments in LNG projects around the world will allow the company to capture higher natural-gas prices and exploit stranded resources. |
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|Bears Say |
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|[pic] |
|The company may find it increasingly difficult to increase production and book reserves as nations become more protective of their natural resources and are |
|potentially averse to working with foreign energy companies. |
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|[pic] |
|The refining segment's margins are negatively affected by the rapid increase in crude-oil prices. It is unlikely that refined product prices will keep pace with |
|crude-oil prices, keeping margins low and reducing profit. |
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|[pic] |
|Chevron's recent success is the result of high commodity prices which are unsustainable, and past performance is unlikely to be repeated. |
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|[pic] |
|International expansion exposes the company to political risks. For example, Chevron's offshore facilities in Nigeria, previously thought immune to attacks because |
|of their distance from the coast, have recently become susceptible to attacks by militants. |
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|Recommended Readings |
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|Chevron Home Page |
|Chevron |
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|Total SA TOT |
|[pic][pic][pic][pic][pic] |
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|by Elizabeth Collins |
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|Analyst Note 08-01-2008 |
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|French oil major Total TOT reported second-quarter results Friday. Net income rose to EUR 4.7 billion, up 39% from EUR 3.4 billion in the second quarter of 2007. |
|Realized oil prices increased 75%, natural-gas realizations were up 48%, and European industrywide refining margins decreased 6%. Oil and gas production was up 1%, |
|to 2.353 million barrels of oil equivalent per day. Startups and ramp-ups of new projects such as the Dalia and Rosa fields in Angola and the Dolphin gas project in|
|Qatar continue to boost production levels. |
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|Thesis 05-16-2008 |
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|French oil giant Total's robust upstream portfolio should enable it to increase production for years to come. |
|Total has invested heavily in its oil and gas exploration and production business. We believe this part of the energy chain--the upstream segment--enjoys an |
|economic moat because OPEC will cut output to ensure high prices. As one of the biggest firms in the oil patch, Total also benefits from economies of scale and |
|geographic diversification. In addition, we think Total is relatively well positioned to exploit two key advantages. First, the firm has less exposure to mature |
|hydrocarbon basins like those in North America, where production is falling and energy resources are becoming increasingly hard to find. Total has a solid pipeline |
|of new projects in the Middle East and Africa, which should allow the firm to meet its aggressive growth targets. Second, because political factors play such an |
|elemental role in the oil industry, Total's French roots can open some doors. For example, Total has operations in Iran, an area no U.S. company can touch. |
|Despite these advantages, Total's foray into political hot spots, along with France's stance on international issues, could also result in significant hurdles for |
|growth. In the campaign by international oil companies to access more Middle Eastern oil reserves, Total may be at a disadvantage when it comes to investing in |
|Iraq. When it's time to award production contracts, the new Iraqi government might be more willing to work with U.S. or British firms. And in countries like |
|Venezuela and Bolivia, Total has been stung by changing political and tax regimes. Still, its geographic diversity means that political pitfalls in any one area |
|shouldn't hurt the overall health of the firm too much. |
|Besides exploration and production, Total has extensive downstream operations--which include refining and marketing--as well as a large chemical segment. It has |
|taken a disciplined approach to investing in these businesses. Despite recently strong refining margins, the firm probably won't significantly expand its European |
|refining capacity anytime soon--it wasn't long ago that the industry suffered from a glut of capacity and resultant weak margins. Instead, Total will focus on |
|expanding downstream activity in Africa and Asia. Also, in May 2006, Total spun off part of its chemical business, whose profitability pales in comparison with |
|Total's other operations. |
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|Valuation |
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|We're raising our fair value estimate to $102 from $84 per share, based on our higher oil and natural-gas price assumptions. In our discounted cash-flow model, our |
|benchmark oil and gas prices are based on NYMEX futures contracts for 2008-10. For natural gas, we are currently using $11 per thousand cubic feet (mcf) in 2008, |
|$11 in 2009, and $10 in 2010. For oil, we are currently using $117 per barrel in 2008, $122 in 2009, and $120 in 2010. Our model incorporates production increases |
|of just under 2%, compounded annually, between 2006 and 2010. |
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|Risk |
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|As with all oil and gas firms, a sustained drop in oil and gas prices is one of the biggest risks Total faces. Potential oil spills and environmental concerns are |
|always issues for the industry, as are political conflicts that could disrupt operations. Total faces more political risk than some of its peers, however, as it has|
|chosen to do business in countries such as Iran and Myanmar. Total is also exposed to the chemical industry, which is highly cyclical. |
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|See Previous Analyst Reports |
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|Close Competitors |
|TTM Sales $Mil |
|Market Cap $Mil |
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|Total SA |
|195,463 |
|110,674 |
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|* |
|ExxonMobil Corporation |
|472,318 |
|379,578 |
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|* |
|BP PLC |
|318,625 |
|146,750 |
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|* |
|Royal Dutch Shell PLC |
|396,604 |
|138,801 |
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|* |
|Chevron Corporation |
|265,879 |
|143,587 |
| |
| |
|* |
|ENI SpA |
|125,833 |
|87,117 |
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|* |
|Morningstar Analyst Report Available | Compare These Stocks |
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|Data as of 06-30-08 |
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|Strategy |
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|Total's primary goal is to increase its oil and gas production over the next several years. Investments in liquefied natural-gas infrastructure will give more of |
|the company's natural-gas resources a viable end market. While Total intends to consolidate its European downstream activities, it will expand its downstream |
|business in Africa and Asia. Finally, the company has spun off part of its chemical business. |
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|Management & Stewardship |
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|Christophe de Margerie became CEO in February 2007. De Margerie has been with Total since 1974, having most recently served as the head of the exploration and |
|production division. De Margerie is currently under investigation regarding allegations that Total made improper payments to Iranian officials as part of the South |
|Pars gas field project, in addition to possible charges for misappropriation of corporate assets and corruption of foreign public agents related to the United |
|Nations' oil-for-food program in Iraq. In both cases, Total believes that de Margerie and the company's activities have been in compliance with the relevant laws |
|and conventions. We believe that these investigations highlight the risks of doing business in politically sensitive regions. There is the chance--however |
|small--that if Total's reputation suffers, the company will find it more difficult to partner with foreign countries on lucrative oil and gas projects. With the |
|appointment of de Margerie, Total separated the chairman of the board and CEO functions; Thierry Desmarest (formerly both chairman and CEO) remains chairman of the |
|board. Desmarest joined Total in 1981 and had served as CEO since 1995. |
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|Profile |
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|Total is one of the largest companies in the oil and gas industry. It became an industry heavyweight when French firm Total merged with Belgian firm Petrofina in |
|1999. The two then combined with French firm Elf Aquitaine in 2000. In 2007, Total boasted 11 billion barrels of oil equivalent in reserves, production of 2.4 |
|million barrels per day, and the ability to refine 2.6 million barrels per day. The company also operates a network of roughly 16,000 service stations. |
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|Growth |
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|Total's growth will come from investments in oil and gas properties, which should boost production volume. Revenue will also fluctuate along with oil and gas |
|prices. In addition, Total plans on expanding its refining and marketing operations in Asia and Africa. |
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|Profitability |
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|High oil and gas prices have allowed Total to post impressive results. Even if prices retreat from their current levels, we think Total's scale and geographic |
|diversity should allow it to be profitable for years to come. |
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|Financial Health |
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|Strong profits and a stable balance sheet have allowed Total to return cash to shareholders. The company has meaningfully increased its dividend and has also bought|
|back a large number of shares. |
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|Morningstar Rating [pic] |
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|[pic] |
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|***** |
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|Stock Price |
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|As of 08-01-2008 |
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|$75.35 |
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|Fair Value Estimate |
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|$102.00 |
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|Consider Buying [pic] |
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|$71.40 |
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|Consider Selling [pic] |
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|$142.80 |
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|Video Reports |
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|[pic][pic]Places to Invest Amid the Oil & Gas Slide |
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|More Videos... |
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|Fair Value Uncertainty [pic] |
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|Medium |
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|Economic Moat [pic] |
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|Narrow |
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|Stewardship Grade [pic] |
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|NA |
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|Analyst Note |
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|Total Reports 2Q Results |
|Elizabeth Collins 08-01-2008 |
|See All Notes |
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|Bulls Say |
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|[pic] |
|The lion's share of Total's investments will go to its upstream segment. Exploring for and producing oil and gas is a business with an economic moat, thanks largely|
|to OPEC's influence over oil prices. |
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|[pic] |
|Thanks to France's political stance, Total has access to resources in countries such as Iran, Syria, and Sudan. U.S. and British peers have shied away from |
|investing in these areas. |
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|[pic] |
|Higher oil prices are driving Total's investments in Canadian oil sands, an area to which the company brings relevant heavy-oil experience from its operations in |
|Venezuela. |
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|[pic] |
|Total has spun off part of its chemical business. Although the chemical industry is currently enjoying strong demand, revenue is highly cyclical and returns on |
|investment are typically poor. |
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|Bears Say |
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|[pic] |
|While Total's peers historically avoided investing in countries like Iran and Libya, this is changing. U.S. firms recently entered Libya for the first time in |
|decades. |
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|[pic] |
|Total has 80 years of experience in the Middle East and Africa, but its foray into Bolivia and Venezuela is more recent. The firm could find it hard to navigate |
|these countries' changing regulatory regimes. |
| |
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|[pic] |
|Labor problems in Total's French refineries have halted operations at a time when refining margins are at a record high. Total will have to work on avoiding strikes|
|that could crimp profitability. |
| |
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|[pic] |
|A good chunk of Total's oil and gas production comes from the North Sea, a mature area that suffers from steep declines in production. The firm will need to look |
|elsewhere to increase oil and gas production. |
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|[pic] |
|While the chemical segment is Total's least-profitable business, it employs the majority of the firm's workers. This overrepresentation could be keeping |
|management's focus away from Total's profitable businesses. |
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|Recommended Readings |
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|Home Page |
|Total |
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