They're big! They're bad (at least, their stock price performances have been)! They're major oil companies Royal Dutch Shell (NYSE: RDS-A) (NYSE: RDS-B) and ConocoPhillips (NYSE: COP)! Shell is the largest oil company in the world by revenue (rival ExxonMobil beats it by market cap), while Conoco is the world's largest independent oil and gas exploration and production company.
Despite a September rally for oil stocks, both of these titans are trading well below their highs. Let's see which one looks like the better buy right now.
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Both Shell and Conoco have implemented bold strategies to thrive in the current low-oil-price environment. Shell's massive purchase of BG Group gave it exposure to liquefied natural gas. Conoco sold off most of its Canadian assets to help get its debt load under control. Now, while comparing these strategies is like comparing apples and oranges, there is a way to weigh how well each has been executing since it implemented them: Look to the companies' returns.
The three primary return metrics are return on equity, return on invested capital, and return on capital employed. Each measures how well a company's management is deploying its investors' money, and, as you can see, there's really no contest here:
Shell has been outperforming Conoco on all return metrics since mid-2015. Currently, Shell's return metrics, measured on a trailing-12-month basis, are all positive, while Conoco's are all negative. That means Shell's management is doing a better job at deploying investors' capital.
Winner: Royal Dutch Shell
A good yield isn't just important to value investors. It also can help salve the pain of investors in beaten-down industries while they wait for share prices to recover. Unfortunately, many oil and gas exploration and production companies have slashed their dividends since the oil price crash in 2014.
ConocoPhillips was no exception. The company's dividend was $0.74 a share in 2015, yielding just under 7% at the time. But in 2016, such a hefty payout became unsustainable, and management -- wisely, in my opinion -- cut the dividend by almost two-thirds to $0.25 per share. It has since raised it to $0.265 a share, but the current yield of 2.1% is the lowest it's been in nearly 10 years.
It's also far lower than Royal Dutch Shell's, which held its dividend steady at $0.94 a share even as the stock price plummeted. That's given Shell a juicy 6% yield. In the industry, only BP's is higher, at 6.3%. So even if Shell cut its yield in half, it would still be higher than Conoco's.
Winner: Royal Dutch Shell.
And all the rest
OK, so it's pretty obvious that Shell is beating Conoco, two metrics to none. I therefore went looking for a metric under which Conoco would prevail over Shell. And... I couldn't find one. Not one.
I looked at the companies' debt: While Shell has far more long-term debt than Conoco ($77.6 billion compared to $27.3 billion), that's because it's a much larger company. On the debt-to-equity ratio, Conoco's is actually higher right now, 43.7 to 39.6. And Shell incurred a lot of its debt from its massive purchase of BG Group, which added a great deal of value to the company as well.
Cash flow and free cash flow metrics? Shell wins. Operating income and profitability metrics? Shell again. I even just picked a random metric -- which turned out to be Daily Value at Risk 5%, with a 10-year look-back. Bet you can guess which company's was better. (Hint: not Conoco's.)
Sorry, Conoco: I tried. I really did.
Winner: Royal Dutch Shell
Why Shell was destined to win
We have to remember that when we compare an independent oil and gas exploration and production company like Conoco to an integrated oil major like Shell, the oil major is going to have a lot of advantages that the independent doesn't. Size and economy of scale are both important, as are the lucrative refining and marketing operations that Shell has and Conoco lacks (having spun them off as Phillips 66 in 2012).
So it stands to reason that Shell is going to absolutely flatten ConocoPhillips when they go up against each other head to head. It's like a boxing match between a flyweight and a super heavyweight. Even if the flyweight is the world champ in his class, the super heavyweight will remain the odds-on favorite. And in this instance, it's Royal Dutch Shell over ConocoPhillips, hands down.
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