It wasn't that long ago that an investment in oil and gas felt like throwing cash into a burning pit. Lower oil prices wiped out hundreds of billions of dollars in market value in a matter of 18 months. Several one-trick ponies in the industry, among them offshore rig owners and independent oil and gas producers, collapsed under the weight of their debt loads. Even the titans of the industry -- the integrated majors -- got walloped.
Today, the industry is looking to be in much better shape. Companies have found ways to cut costs and turn a profit with oil prices at much lower levels than they were three to four years ago. It also helps that oil prices are still creeping upward.
For investors looking for an opportunity in this still beaten-up sector, Big Oil is an excellent place to turn. These giants not only withstood the blow of low prices but also reoriented their businesses to be much more profitable entities. Despite what some might think, not all Big Oil companies are created equal. So let's dive into this sector to see which of these companies is the best stock to buy in 2018.
Whom are we talking about, anyway?
Most of the integrated oil and gas companies are incredibly recognizable brands in the U.S. -- ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), Royal Dutch Shell (NYSE: RDS-A) (NYSE: RDS-B), BP (NYSE: BP). Others, including Total (NYSE: TOT) and Statoil (NYSE: STO), are much more recognizable in Europe.
To look at these companies holistically, you need to look at the typical metrics -- margin, cash flow, returns, valuation, and so on -- but also their investment plans, because the energy landscape is changing under our feet. So here's a look at all of these things and how the stocks compare with each other as a potential investment.
What's eating margin and returns?
Two things pop out when looking at these results. On one hand, gross margin for each company is in line with 10-year historical averages despite lower prices lately. This development is due to two significant changes in how these companies operate:
- The price at which they can produce oil and gas has come down significantly during this weak commodity price environment.
- Downstream operations such as refining and chemical manufacturing, which have historically been treated like the middle child of the business, have been optimized.
On the other hand, those margins start to deteriorate the further we go down the income statement. During the downturn, these companies either did some restructuring or took some writedowns to adjust their businesses and used debt to bridge the funding gap between operating cash flow and spending. Those charges and higher interest payments have taken a toll. BP was hit particularly hard because it ponied up a lot of cash for the Deepwater Horizon spill. Management did note that these costs will be much lower in the coming years.
The two companies that have bucked this trend are Statoil and Total. Statoil has been able to do so thanks to exceptional results in Norway, and Total has benefited immensely from a downstream revitalization plan and a cost-cutting program.
Looking at rates of return, all of these results appear similar to what the net income margin results showed us. The one exception here is Statoil, because it took some big writedowns in prior quarters that are adversely affecting results for the year.
Here's how the companies rank in this category:
1. Total2. ExxonMobil3. Statoil4. Royal Dutch Shell5. Chevron6. BP
The return of cash flow
As nice as earnings look on paper, they can occasionally mask some problems in an industry that's so capital intensive. Cash flow is arguably more important than earnings in this business. The ability to generate enough cash to cover massive spending budgets, pay generous dividends, and fund other opportunities such as acquisitions or share repurchases is an incredibly important metric for the health of this business.
As the price of oil started to dip, so did cash from operations. However, we're starting to see cash flow results trend upward again as oil and gas prices rise slightly and each company lowers its breakeven price.
At the same time, capital spending budgets have declined from the delay of some projects and from wringing out additional costs. That has helped to boost the most important number for these companies: free cash flow.
Looking at these charts, it would appear that ExxonMobil and Shell are head and shoulders above the rest. That isn't necessarily the case, though, because Exxon and Shell are much larger companies. A better way to look at these companies' cash-generating ability is to measure free cash flow to assets, which accounts for the size of the company.
Also, here's a look at the companies' operational cash flow as a percentage of capital spending. This metric is a helpful gauge of the changes in incoming cash and spending habits in recent years.
These results yield a different conclusion than the charts. In this case, Shell, Statoil, and Total are all outperforming their historical averages, which is an incredible feat when you consider where are oil prices are.
Stepping back, these results make some sense. Ten years ago, we were at the height of "peak oil" fears, and some oil executives were saying we could expect oil above $250 a barrel. As a result, these companies took on some costly development projects. So capital budgets from 2010 to 2014 were abnormally high. Now that companies are learning to get a lot more out of their development portfolio with less capital, cash flow to assets is on the upswing.
The company that has taken this change to heart is Shell. Historically, Shell was known as the "engineers' oil company" that would take on challenging projects. As oil prices started to crash, though, CEO Ben Van Beurden made the company focus more on the value of its products rather than the volume it produced. As a result, the company has made drastic improvements to its free cash flow.
Here's how the companies rank in this category:
1. Royal Dutch Shell2. ExxonMobil3. Statoil4. Total5. Chevron6. BP
An eye on outlook
Now that we have a handle on what each company can do with oil prices where they are today, let's start looking at where each company goes from here. Here's a rundown of what the management teams have said during their investor and analyst day meetings.
Perhaps one of the reasons BP's cash flow metrics are so lousy is that the company is in the midst of an ambitious growth phase. In 2017 alone, the company expects to bring seven major capital projects online, and year-over-year production is up 9.5%.
It appears that, based on the company's most recent strategic outlook presentation, this is the beginning of something big. Between now and 2021, BP plans to add 1 million barrels of oil equivalent per day to its current production. That production increase -- plus its equity stake in Russian oil company Rosneft -- could make BP the largest producer in 2021.
One thing that we learned, though, is that growing production for growth's sake is a recipe for disaster. BP learned this the hard way during the Deepwater Horizon spill. According to the company's projections, it expects upstream free cash flow to grow to $13 billion to $14 billion based on an average price of Brent crude (the international benchmark) of $55 per barrel. That oil price is a touch higher than today, but it's a reasonable assumption and represents a significant increase in cash flow, so we can assume its cash breakeven is significantly lower.
On top of its upstream plans, the company intends to boost its downstream results significantly. That plan stands on three core pillars: improved refining performance, better sales of lubricants, and a more significant retail presence.
The refining and lubricant business is probably its most uncertain bet. BP doesn't have plans to build new refineries. Instead, it wants to upgrade its existing facilities to produce higher-margin products and lower costs. It has done a commendable job of improving its refinery operations recently, but there's one thing that makes this strategy look a little fishy. BP's refining assets in the U.S. have been designed to process lots of heavy Canadian crude, and the company's projections assume that Western Canadian Select (the Canadian benchmark oil) will sell at a $15-per-barrel discount to West Texas Intermediate (the U.S. benchmark price).
The price difference between these two crudes has been converging for the past five years. Shale oil has become much less expensive to produce, and the price differential between these two crudes has not been $15 or more for some time. It doesn't look as if this trend is going to reverse anytime soon, either. U.S. shale production continues to rise, and there seems to be a consensus that nobody will be investing in a new oil sands facility for a long, long time.
If this is indeed the case, there's a good chance that BP's downstream business might not live up to management expectations. Based on its upstream production plans, though, it may not matter that much.
Integrated oil companies have all followed a similar blueprint to improve their financial performance:
- Cut capital spending and operating expenses.
- Sell assets to "right-size" the business.
- Take on debt to bridge funding gaps in the interim.
- Spend on on new, lower-cost projects.
The difference for each company has been the pace at which they can execute this plan plans.
Chevron has been one of the slowest companies to enact these changes, and its Gorgon and Wheatstone LNG projects are to blame. These two projects have taken years and billions to develop. Since capital was already committed to these two LNG export facilities, the company couldn't simply stop construction. As a result, it was harder for the company to lower overall spending rates and react to the changing dynamics of the market. Now that Gorgon is complete and Wheatstone almost finished, the company is at the "right size" phase.
Chevron is much more focused on upstream production than its peers are. What's interesting about Chevron is that it seems to be doubling down on this position by divesting several billion in downstream assets, including its refineries in Hawaii, British Columbia, and South Africa.
One would assume that it would then plow that money into growing profitable production, but the company's growth plans look rather modest. Between now and 2020, management doesn't expect production to exceed 3 million barrels per day after adjusting for asset sales. With production at 2.72 million barrels per day, that isn't a whole lot of growth. The most prominent contributor to the company's earnings growth will be continued reductions in cost to boost upstream margin.
Chevron is more or less holding serve over the next few years as it looks to lower its breakeven production costs and generate more cash per barrel produced. The one fear here is that the company is being left behind.
There was a time when "integrated" meant a company would carry the same molecule of oil or gas from the well all the way to the end market. As these corporations diversified globally and picked the highest-return projects, those value chains became less and less "integrated" and eventually became a collection of assets along the value chain. Exxon was a shining example, as its sources of production didn't necessarily connect with its refining and petrochemical manufacturing hubs.
Looking at Exxon's spending plans over the next few years, though, that is going to change. Much of ExxonMobil's capital spending is going into two key assets: Its shale assets in North America and its refining, chemical manufacturing, and export capacity near the Gulf Coast. The theory is to leverage its production to supply its massive refining and petrochemical production facilities with cheap domestic feedstocks, and to generate better returns from each molecule.
The upstream component is centered on Exxon's massive Permian Basin holdings. Exxon believes there are about 60 billion barrels of oil in place in its holdings there. Based on the expected returns at current oil prices, management intends to grow its Permian and Bakken shale production by 20% annually between now and 2025 to around 800,000 barrels per day. Even more striking is that management expects more than half of its upstream capital spending will go to short cycle production like the Permian and Bakken.
There is, of course, a trade-off for these investments: a slower development pace for its international operations. Except for its offshore project in Guyana, the company's spending on major capital projects look much more timid than what we've seen in the past. That's why investors should only expect production growth of 200,000 to 600,000 barrels per day between now and 2020.
A benefit of ExxonMobil's approach is that it doesn't have to do much "right-sizing" of the business in the interim. Unlike most of its peers, management doesn't have plans for significant asset sales, and it doesn't have to do as much to get its balance sheet back into fighting shape. The thing that will determine the success of this strategy is how soon it can get back to buying back stock as it has in the past.
Overall, this is par for the course for ExxonMobil. It didn't overreact when the crash hit, and it isn't overreacting as oil prices recover. This formula is the one the company has used for decades. It's hard to imagine it will change course anytime soon.
4. Royal Dutch Shell
Shell's decision to buy BG Group for $70 billion in 2015 was like going all-in before seeing all the cards in a game of poker. It was an audacious bet when no one had any idea how long and how severe the downturn would become. It looks as if that bet is going to pay out.
Perhaps the most important part of Shell's transformation wasn't the purchase of BG, but what management decided to do with all of those assets afterward. Shell took BG's assets, looked at the new combined entity, and ditched several assets that didn't have much overlap or cost synergies. So far, the company has unloaded more than $20 billion in assets, with plans to shed another $10 billion.
What's left is a company that has a concentration in two segments: LNG and offshore drilling. Shell is already the biggest LNG player, with more than 45 million tons per year of liquefaction capacity. The company also has another nine liquefaction terminals under consideration.
On the deepwater side of things, the company has an immense concentration in the U.S. Gulf of Mexico and the pre-salt formation off the coast of Brazil. The company has a stake in 14 different production platforms there that should produce 1.7 million barrels per day in the next few years -- Shell has to share that production with its equity partners, though.
Overall, the company expects production to grow 800,000 barrels per day between now and 2020. Almost all of that will come from its LNG and offshore investments. What's more important is that the company expects to generate $10 billion annually from just its upstream segment in 2018. That estimate is based on having the price of Brent oil hover around $60 a barrel.
Shell has some investments in shale, but they are still very much in the early stages. Management doesn't anticipate that it will be able to monetize its shale acreage until 2020, when it has adequate infrastructure in place.
On the downstream side of the business, Shell is investing heavily in chemicals and lubricants. The company expects to spend about $3 billion to $4 billion annually on projects including a 1.6 million-ton-per-year polyethylene facility in Pennsylvania, a 1.2 million-ton-per-year ethylene facility in China, and an additional 425,000 tons of olefins production at its Geismar facility in the U.S. Gulf Coast. High-margin chemical products like these have transformed Shell's chemical segment, which today has average returns on capital employed in excess of 20%.
Shell's BG acquisition may have looked like a high-risk bet, but it has paid off well. Now, the company has a much better business upon which it can build.
Statoil is the outlier of this group. Its investments are heavily weighted toward its home country. Norway is the largest producer of oil and gas in Europe and is one of the only non-Russian suppliers of natural gas that can be shipped by pipeline. Statoil has an immense geographic advantage and a captive customer base in mainland Europe. Europe has to import much of its natural gas, and much of that is LNG. Therefore, the price for gas is much higher than in other parts of the world. Fortunately for Statoil, its Norwegian gas doesn't have to go through the expensive process of liquefaction, ship transport, and regasification, resulting in much higher realized prices and margins.
It appears that, based on the company's plans, it intends to leverage these advantages and focus on value creation more than anything else.
One of the most telling things in Statoil's investor presentations is the company's focus on its breakeven costs. Almost all of Norway's oil and gas deposits are offshore and in harsh environments such as the North Sea and the Arctic, which are typically higher-cost sources. While it has the benefit of higher gas prices and lower transportation costs, Statoil's expenses have historically been higher than those of its peers.
Recently, the company has ruthlessly cut costs for its Norway production. It has gone from a breakeven cost of $90 a barrel of oil equivalent back in 2013 to $27 per barrel of oil equivalent today. At that low of a price, the company can reasonably assume that it will generate a decent per-barrel profit margin no matter what happens with the price of oil or gas over the next several years.
Statoil also has some equity investments outside Norway, the largest of which are in the U.S. -- both offshore and shale -- and Brazil. Overall, though, these are non-operator stakes that will rely more on the efficiency of its partners than on its operations. There is indeed some room for upside, but it's relatively minor.
In exchange for incredibly low breakeven costs, Statoil has a much more modest growth plan. Between now and 2020, the company only expects to grow organic production by 3% annually. Also, Statoil doesn't have significant capital plans for downstream assets.
Total's high rates of return over the past few years were a result of serendipity. Right as oil prices started to crater in 2014 and 2015, the company was completing several of its major capital projects. In 2015 alone, the company increased production by 9%, which is incredible. The additional benefit of bringing all these new assets online is that it reduced capital spending obligations.
One thing you can give management credit for is using this serendipitous time to cut costs and maintain a low breakeven price. All of management's investment decisions and projections for free cash flow are based on having a barrel of oil stay at $50 to 2020. With international crude prices in the $60-$65 range already, this looks like a conservative estimate that could produce better-than-expected returns.
Total's growth is pinned on three core ideas:
- Add oil production if it has a low breakeven price.
- Expand presence in LNG.
- Grow chemical production and marketing segments.
This strategy explains several moves, such as taking on contracts to operate oil and gas fields for Middle Eastern countries and buying Maersk's oil and gas assets. These assets are more mature fields with a lot of oil left in them and low breakeven prices. They may not provide the massive potential of a new reservoir, but they ensure a reliable rate of return for years.
Total estimates its production will grow 5% annually until 202, most of which will come from LNG. It has LNG export facilities under construction in Russia and Australia and an equity stake in a prospective terminal in the U.S., and it's also mulling plans for a terminal in Papua New Guinea. By 2022, total wants to double its LNG trading portfolio and own 5% of the global LNG trade.
To generate better returns from chemical manufacturing and retail business, Total is investing heavily in the U.S. Gulf Coast, South Korea, and Saudi Arabia, where it either has access to cheap feedstocks or a captive market. On the retail side, Total is investing heavily in Africa, where its goal is to own 20% of the retail market. By 2020, it expects its free cash flow contribution from downstream to increase 37% to $5.5 billion.
For a group of companies that are typically bundled together as the same thing, these are diverse investment plans. Chevron and Statoil look as if they want to stay in a holding pattern, in terms of production, to capture better margin. That's not a terrible plan, but investors can get higher margin from every company mentioned. BP's plans are ambitious and could potentially have the most upside of the bunch, but if its assumptions for its downstream strategy don't pan out, it could be a detriment.
ExxonMobil's plans are safe. The company has opportunity for upside with its Permian and Guyana assets without committing too much capital. Also, its investments in downstream could be incredibly lucrative. The one knock is the modest production increases, but that could change.
Total and Shell look like the complete package: production growth with reasonable breakeven prices and a focus on lucrative markets such as LNG and petrochemicals. Total might look like the better bet with that $50-per-barrel price assumption, but Shell is already generating gobs of free cash flow. We can probably expect that to continue even if prices remain where they are today.
Here's how the companies rank in this category:
1. Royal Dutch Shell2. Total3. ExxonMobil4. BP5. Statoil6. Chevron
Beyond oil and gas investments
Let's address the 900-pound gorilla in the room for oil and gas investments: climate change and the rise of renewables. For years, oil and gas companies have dismissed climate change as a risk to their business. Some of these companies previously flirted with investments in renewable energy; most abandoned them after the Great Recession because of poor rates of return and the need to raise cash.
The tide is starting to change, though. Every year, solar energy and wind energy have become less expensive, and they're now the lowest-cost sources of electricity. Furthermore, battery technology is also advancing by leaps and bounds. While batteries and electric vehicles may not be wholly cost-competitive with internal combustion engines now, they're catching up fast.
If you look at the investment plans for these oil companies, you can see that renewables are influencing their decisions. They will probably chalk up low production growth numbers to improving balance sheets, but there seems to be a tacit acknowledgment that oil demand growth is waning. Moving to natural gas and petrochemicals is the move a company would make to adjust to a world where oil is used less for fuel.
For investors looking to buy these stocks for the long haul, it's time to consider each company's plan to handle these changes. Here's a look at each.
Big Oil companies' investment strategies for alternative energy seems to fall into three categories: Deep research with small annual capital commitments, sizable capital commitments without expectation for returns, or capital commitments with expectations for returns. BP lands in the middle of this cycle. The company is committing $200 million to its non-fossil-fuel portfolio, which has 1.4 gigawatts of wind-power generation, 10 million tons per year of biofuel production, and several other longer-shot investments in new research.
According to management, these businesses generate positive operating cash flow, but there is no mention of an expected rate of return. Perhaps in the near future, we will start to see plans that add expectations to that spending.
In all of Chevron's investor presentations over the past year, there has been no mention of any alternative investments or future commitments to anything other than fossil fuels. Perhaps this is a product of still "right-sizing" the business. However, it would be encouraging if the company could come up with a plan sooner rather than later.
Exxon's approach has a "have your cake and eat it, too" feel about it. The company says it has invested $7 billion to reduce the carbon emissions of its current operations and that it spends $1 billion a year on research and development into several low- or no-carbon technologies. If you look at some of the options it's proposing, though, it doesn't change the dynamic of the company that much.
The two big ideas Exxon is working on are carbon sequestration and second-generation biofuels. Admittedly, these ideas are somewhat novel and could be exciting options if they can become commercially viable. On the carbon sequestration front, the company is working with FuelCell Energy to develop a fuel cell that can turn CO2 emissions into additional power and condensed CO2 gas that is then injected into underground storage. It would enable power generation from fossil fuels, notably natural gas, to be emissions-free.
The other idea is a new method for manufacturing biofuels. Current biofuels such as ethanol compete with food crops for valuable items like arable land, water, and fertilizer. Also, current biofuels aren't chemically identical to petroleum products and can cause engine trouble. ExxonMobil and its partner Synthetic Genomics are is looking to develop a biofuel from algae that would not only be chemically identical to gasoline but would also not require the same valuable inputs.
Shell is somewhere between spending a lot of money without expectations and spending money with return expectations. At its most recent management day presentation, the company announced it would spend $1 billion to $2 billion on what it calls its new energies segment. This business segment is doing work on a plethora of projects from biofuels, hydrogen as a fuel, and power generation. While the company doesn't have any expectations as of yet for its existing investments, it does specify that any investment in power generation would have to have a rate of return in the 8%-12% range.
Shell has been proposing hydrogen as a potential alternative fuel for a long time, mostly because it plays well into its existing business structure. Hydrogen fuel cells themselves don't produce any carbon emissions, but the only economical way to produce hydrogen gas in commercial quantities is a process known as gas reformation, which requires natural gas. So it's in the company's interest to make hydrogen a viable option.
Statoil seems to have found a great way to merge its current competencies and the alternative energy world with offshore wind. If there's one thing that oil and gas companies have learned to do over the years, it's how to build multibillion-dollar facilities in the open ocean that can handle harsh conditions. Statoil has 5.8 gigawatts of offshore wind facilities either in operation or under construction, with more likely to be on the way, as it has been able to reduce installation costs by as much as 40% over the past five years.
Statoil appears to be all-in and expects a rate of return on these investments. Today, the company expects a 9%-11% return on its wind investments and plans to spend between $500 million and $750 million on non-fossil fuels from 2017 to 2020. Management estimates that by 2030, 15%-20% of annual capital spending will go toward non-fossil-fuel energy.
While perhaps not quite as ambitious as Statoil's plans, Total is further down the investment path with renewable energy than most of its peers are. This past year, management announced that it will spend $500 million annually on renewable energy.
The company already has a majority stake in U.S. solar-power company SunPower, which makes it a major player in the U.S. market. It also spent $1.1 billion last year to buy specialty-battery company Saft, which it believes will help put itself on the map for energy storage combined with power-generating assets.
The company's expectations for returns today aren't great, but down the road, it expects a lot from these alternative-energy investments. By 2022, Total wants to own more than 5 gigawatts of power-generating capacity and generate $500 million in free cash flow annually from its gas, renewables, and power segment -- which doesn't include natural gas production, just gas trading.
Statoil is the furthest along with its non-fossil-fuel developments. It has found a niche in which it has a competitive advantage, it is dedicating large sums of money today, and it has expectations for decent rates of return. If it does get to an investment level of 15%-20% of total capital spending, then we're talking about a lot of money for offshore wind.
Total is solidly in second place. Its investments in solar are much further along than those of its competitors are, and it seems to have a pretty clear strategy of how it wants to tackle renewable power. Shell is spending a lot of money, but it's more like throwing out a bunch of different ideas and seeing what sticks at this point. BP and ExxonMobil are next, because they don't seem to have a coherent strategy yet. Some of the ideas are intriguing, but neither has a true path to profitability.
Then there's Chevron, which for now is punting on the whole renewable-energy idea.
Here's how the companies rank in this category:
1. Statoil2. Total3. Royal Dutch Shell4. BP/ExxonMobil (tie)6. Chevron
Now that we have an idea of what we're investing in, it's time to see what kind of value we're getting if we buy shares. Since this is a cyclical industry, valuation matters, so keep in mind that the valuation and where we are in the cycle are both critical.
I think it's reasonable to say the industry is on the upswing. That suggests we should expect higher-than-average valuations. Here's how they all stack up.
One single valuation multiple by itself can be rather misleading. If we look at price to earnings alone, all of these stocks look rather expensive. Keep in mind, though, that all of these companies have had asset writedowns or impairments recently that have negatively skewed earnings. By comparison, these stocks look rather cheap on the basis of both total enterprise value (EV, or market cap plus debt) to sales and enterprise value to EBITDA. For comparison's sake, let's look at the 10-year historical averages.
Comparatively, these stocks aren't as much of a deal as they initially appear. All of them trade at a premium on at least one metric. Keep in mind, though, that if we are indeed in a market upswing, we should expect valuations to be slightly higher.
I'm fond of price to book value because it gives a valuation of the underlying business that generates earnings rater than the earnings themselves. That can help to smooth out some of the cyclical nature of the business.
The ones that stand out are Total and ExxonMobil. Both are trading at decent discounts compared to their historical book values. I'm giving Total a slight advantage here because its price-to-earnings ratio today is much more in line with the 10-year average than Exxon's. BP is next because it's more or less in line with its historical book value and trades at a discount on an EV/EBITDA basis. After the writedowns and payments for the Deepwater Horizon spill start to come off the books, perhaps that price-to-earnings valuation will fall back in line.
Here's how the companies rank in this category:
1. Total2. ExxonMobil3. BP4. Royal Dutch Shell5. Chevron6. Statoil
Putting it all together, here are the rankings we get.
What a Fool believes
Following Big Oil stocks over the past few years has been fascinating. When oil prices crashed from 2014 to 2016, the market rightfully gave management teams a spanking for pursuing too many projects at once and being a little too cavalier with their spending. Surprisingly, almost all of them were able to cut costs and capital spending significantly without cutting production or sacrificing too much short- to medium-term growth.
While no one can say with any certainty that we're in a new normal for oil prices, it's getting harder and harder to envision a scenario where oil prices collapse much below $50 a barrel. According to Chevron, the next 13 million barrels per day slated to come online between now and 2025 -- these are the barrels that will replace existing production and meet demand growth -- have an average breakeven price of $50 a barrel. Now that companies realize what kind of damage a couple of years of undisciplined capital spending can bring, they're much less likely to pursue aggressive production growth.
As it stands today, the price of Brent crude is in the $65-per-barrel range. That's well above the breakeven prices each company has used as its price projection. If this price holds, then we could see some significant share-price gains in 2018.
Looking at these numbers, we see an extremely tight race among Total, ExxonMobil, and Royal Dutch Shell for the top spot. It all depends on how much you value plans for when fossil fuels are less dominant and current valuation metrics. Even though Shell isn't quite up to snuff on the margin and returns and is slightly more expensive than the others, I think that's going to change in 2018. The company took a lot of non-cash charges that affected earnings last year and will roll off the books. As this happens, its returns should be more in line with its incredible cash-generating abilities. This is an astonishing turnaround for the company, considering it was an also-ran for the past few years.
Exxon may be slightly less expensive, but its long-term plans don't look quite as ambitious as Shell's on paper. Shell also gets the nod over Total because Total's free cash flow-generating abilities are still less certain. As Shell has shown, though, these situations can change quickly.
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