A Look at Integrated Energy Stocks’ PEG Ratios after 3Q17 Earnings
Integrated Energy stocks’ PEG ratios
In the preceding part, we observed integrated energy stocks’ short interest changes. In this part, we will analyze their PEG ratios.
PEG ratio stands for price-to-earnings-to-growth ratio. This ratio measures a stock’s valuation after factoring in expected future growth rate. A PEG ratio that is less than one typically signifies an undervalued stock.
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ExxonMobil (XOM) has the largest PEG ratio of 0.83, which is well above the peer average of 0.45. The peer average considers the average PEG of the four leading integrated energy companies being discussed in this series. Chevron (CVX), Royal Dutch Shell (RDS.A), and BP’s (BP) PEG ratios stand under the peer average at 0.21, 0.41, and 0.32, respectively.
Integrated energy stocks’ capex
The PEG ratio considers not only the growth rate (in earnings) for the next two years but also long-term growth rate. To grow their earnings, integrated energy firms, have been taking strict measures in the past few years.
XOM, CVX, Shell, and BP have been squeezing their cost structures to create a lighter cost model that is sustainable at lower oil price levels. Also, they cut their capital spending to concentrate on projects that are most competitive and that fit their overall strategy.
Shell’s capex in 3Q17
In 3Q17, Royal Dutch Shell (RDS.A) incurred a total capital investment of $5.8 billion compared to $7.7 billion in 3Q16. Of its total investment in 3Q17, $2.4 billion was in the Upstream segment, $1.4 billion was in the Downstream segment, $1.2 billion was in the Integrated Gas segment, and remaining was applied to exploration expenses and investments in joint ventures.
Shell is in the process of churning its upstream portfolio to retain only competitive assets. Shell expects its new projects, which began in 2014, to contribute ~1 MMboepd by 2018. Also, they are expected to generate ~$10.0 billion in cash flows for the company.
In 3Q17, Chevron incurred capex (capital expenditure) of $4.5 billion, ~88% of which went toward its Upstream segment. In the quarter, Gorgon’s 3Q17 production surpassed 400,000 barrels of oil equivalent per day.
The Wheatstone project announced its first LNG on October 9. The project’s Train 2 is expected to commence in 2Q18. For 2017, Chevron foresees 6%–8% growth in its net hydrocarbon production due to new fields start-ups and existing fields ramps-ups, which were partially offset by maturing fields declines.
XOM and BP’s capex in 3Q17
In 3Q17, ExxonMobil (XOM) incurred capex of ~$6.0 billion compared to $4.2 billion in 3Q16. Of the 3Q17 capex, $3.2 billion was incurred toward the Upstream segment. Plus, $0.61 billion and $2.2 billion was incurred toward the Downstream and Chemical segments, respectively.
High capex in the Downstream and Chemical segments resulted from the completed acquisition of the Jurong aromatics plant.
BP’s organic capex for 3Q17 stood at $4.0 billion compared to $3.5 billion in 3Q16. BP foresees its organic capex to be ~$16 billion in 2017. From 2018 to 2021, BP expects its organic capex to be $15.0 billion–$17.0 billion per year.
BP plans to add ~1.0 MMboepd (million barrels of oil equivalent per day) of new production net to BP by 2021. Of these, ~800 Mboepd (thousand barrels of oil equivalent per day) could be added by its key projects, and ~200 Mboepd is expected from new portfolio additions.