Integrated Oil Companies as Commodity Investments
Oil companies get a bad rap. Whatever you may think of them, they make for a great investment. Integrated oil companies are sometimes known as “big oil,” “the majors,” or “integrated oil companies.” These are the oil companies that are involved in all the phases of the oil-production process, from exploring for oil to refining it and then transporting it to consumers. ExxonMobil, Chevron Texaco, and BP are all “big oil” companies.
Big oil companies aren’t the only players in the oil business. Many other companies are involved in specific aspects of the transformational process of crude oil. For example, some companies, like Valero, are primarily involved in refining; others, such as General Maritime, own fleets of tankers that transport crude oil and products.
The major oil companies have been posting record profits in recent years. In 2005, ExxonMobil announced the largest annual corporate profit in history as it earned a staggering $36.1 billion on revenues of $371 billion! To put it in perspective, Saudi Arabia’s 2005 GDP was $338 billion. The company continued its record string of earnings, posting net income of $40.1 billion in 2007 and $45 billion in 2008. It went through a rough patch in 2009 with the Global Financial Crisis but still managed to earn more than $19 billion for the year. Another big oil company, ConocoPhillips (NYSE: COP), raked in $13.53 billion in profits for 2005, up 66 percent from the previous year. In 2009, ConocoPhillips posted net income of $4.8 billion. Meanwhile, Chevron Corp. posted $10.4 billion in net income for 2009.
These announcements are a result of the increased global demand for crude oil and its products, as well as the technological and managerial efficiency practiced by the majors. As global demand continues and supplies remain limited, I expect big oil companies to keep generating solid revenues and profits. As the Global Financial Crisis amply demonstrated, earnings and revenues don’t move in a straight line; you need to be able to tactically position your portfolio to profit from short-term market disruptions. In Table 3-7, I list some of the companies you may want to include in your portfolio.
|ExxonMobil||XOM||$394 billion||$51 billion|
|Chevron||CVX||$170 billion||$19 billion|
|ConocoPhillips||COP||$165 billion||$7.5 billion|
|Eni||E||$102 billion||$5.5 billion|
This table is only a brief snapshot of some of the major integrated oil companies you can choose to add to your portfolio. For a more comprehensive list, check out Yahoo! Finance’s section on integrated oil companies.
Most of these traditional oil companies have now moved into other areas in the energy sphere. These companies not only process crude oil into different products, but they also have vast petrochemicals businesses, as well as growing projects that involve natural gas and, increasingly, alternative energy sources. (To reflect this shift, for example, BP has changed its name from British Petroleum to Beyond Petroleum.) The bottom line is that investing in these oil companies gives you exposure to other sorts of products in the energy industry as well.
Although revenues and earnings are important metrics to look at before investing in these companies, you also need to perform a thorough due diligence that considers other important factors to determine a company’s health.