Pain at the Pump: Are oil company stocks benefitting from high gas prices?

Investing, Investments

In light of today’s extremely high gas prices, Americans are curious to see how big American oil companies – and their stocks – have fared.  Are they suffering too, or are they benefitting?  Should investors look to the big oil stocks as a way to get back the money they are losing at the pump?

Why Are Gas Prices So High, and Do Oil Stocks Benefit?

Average Americans blame the big oil companies for the problem; it’s no surprise that individuals think higher gas prices will lead to higher stock prices for oil companies. After all, it is true that higher gas prices that bring additional revenue.  But is that the whole story?  At the same time, there are multiple reports of stocks hurting from rising gas prices. It makes sense because consumers now have less discretionary income to invest in the stock market. Gas prices are actually an implicit tax.

The proof is in the pudding when comparing the Energy Select Sector SPDR (NYSE: XLE) with the United States Gasoline Fund (NYSE: UGA).  The XLE tracks oil stocks like Exxon Mobil (XOM) and Chevron (CVX), while the UGA is an ETF that tracks gasoline prices.  The takeaway: though there’s a correlation between the two, the XLE has consistently underperformed the UGA most of the time.  Investors will be hard pressed to predict the trajectory of oil stocks. Let’s compare and contrast the top S&P 500 oil companies.

Oil Company Stocks By the Numbers

We look at these 5 stocks: Exxon Mobil, ConocoPhillips, Chevron, Marathon Oil and Chesapeake Energy.

For context, the second quarter of 2011 had seen Exxon Mobil, Chevron and Conoco Phillips all announce higher profits in part due to super high gas prices. These big oil companies then reinvested the profits by buying back the stock of their respective companies.  Such a practice will obviously drive each stock price up, which top management likes because it makes their compensation more valuable.  The stock buybacks were similar to the first quarter in 2011.

Exxon Mobil

Exxon Mobil was recently dethroned by Apple (AAPL) as America’s most valuable firm, yet the leading U.S. energy company has managed to post impressive earnings. The problem is that the stock price has only increased 4 percent even with soaring gas prices. The stock has significantly underperformed the S&P 500, which is up 11.6 percent since the beginning of the year.  But there’s not much for investors to fear; Exxon pays a good dividend that increases every year indicative of its cash holding. Its fundamentals are great and the stock has been on an uptrend for a couple of years now.

ConocoPhillips

ConocoPhillips (COP) has been on a long-term downtrend falling 16.1 percent over a 1-year period to $58.05 a share. It has surged as of late and this could be because oil companies are able to increase their cash pile when gas prices rise as is going to be the case this winter when it will be $5 a gallon at the pump.  An encouraging sign is the P/E ratio of 11.21 which is only second to Marathon Oil’s P/E of 12.58 out of the five stocks discussed here. A high P/E indicates that investors expect earnings to grow faster.

Chevron

Chevron (CVX) is trading at $112.49 a share; up 16.9 percent since last year. Chevron is mired in a controversy over lawsuits which has seen the demand for its stock drop. The citizens of Ecuador and Nigeria have given evidence on Chevron’s conduct in the respective countries. It has been on a long-term uptrend much like Exxon Mobil, but these lawsuits have hurt the stock price, which could be much higher. The Earnings Per Share (EPS) of $13.43 has continued to be lower than what analysts have expected.

Marathon Oil

Gas prices are certainly not the only determinant of performance; there are several other factors that influence the stock price of big oil companies. Take Marathon Oil (MRO), a relative newcomer to the game, for instance that is trading at $31.27 a share; mighty close to its 52-week high. Although, Marathon has the lowest EPS of the five stocks with $2.49, it has accelerated its drilling plans in an attempt to compete with the likes of Exxon Mobil by boosting its oil and gas supplies. Expansion is important for these big oil companies with Chevron and Exxon Mobil also hoping to creatively expand.

Chesapeake Energy

Chesapeake is the second largest U.S. natural gas producer.  The stock price of Chesapeake Energy Corporation (CHK) at $20.86 a share as of this writing trails all the other S&P 500 oil companies. The stock has actually lost value over the last few years when gas prices have spiked with the stock price falling 23.4 percent since this time last year. It is on a bit of an uptrend right now, but it is nothing compared to Chevron, which is on fire.  Additionally, Chesapeake Energy’s market cap of $13.93 billion is the lowest of the five oil stock stocks.

How to Invest In Oil and Energy

The bottom line: many things influence a big oil company’s stock price. Investors should always look closely at fundamentals before making a decision on whether to buy the stock or not. It is to be expected that higher gas prices will add to the cash pile of big oil companies, but this is no guarantee of positive stock performance over time.  Mechanical failures, legal disputes and the emergence of clean energy sources are threats to oil companies, while in general companies that sign new leases and find new oil and gas sources that will do well. Marathon is an example of this, while Exxon has sold a lot of its sites and as a result seen an influx of cash.

British Petroleum (BP) and Royal Dutch Shell (RDSA) have not been included in this analysis because they are not part of the S&P 500.