Here is a crazy statistic that crossed my desk recently about the performance of the Big Oil supermajors in relation to the S&P 500 over the past twenty years: every single supermajor outperformed “the market” since July 8th, 1993.
Over that time frame, BP returnd 9.6% annually.
Total SA returned 10.9% annually.
Chevron returned 12.7% annually.
Exxon returned 11.8% annually.
Conoco returned 12.0% annually.
Meanwhile, the S&P 500 returned 8.6% annually.
The secret to the success of the big oil companies is that they are able to fire on all cylinders: they pay a healthy dividend, they buy back their own stock, and they put in the needed capital expenditures to fuel future growth. It is a great way to add meaningful diversification to your portfolio because when oil prices rise, most other S&P 500 stocks fall, and vice versa. That is to say, when oil prices are rising rapidly, your oil stocks will go up while your other holdings might experience a bit of a drag.
And the great part is that a big chunk of the total returns from these stocks come in the form of dividends. In the case of Exxon and Chevron, you get a low starting yield and a high dividend growth rate. In the case of Conoco, BP, and Total, you get a higher starting yield and a lower dividend growth rate.
Personally, I think each of these five stocks (plus Shell) serve as the great pillars of an income portfolio. Some people shy away from energy investments as long-term investments because they fear the non-renewable nature of fossil fuels or the ever present threat that “alternative energies can offer.”
In response to the first objection, it is all about the reserve replacement rate. If you are replacing your reserves at a rate over 100%, you are increasing your available resources to work with. If an oil company falls to reach that 100% threshold, then it is depleting resources and getting smaller. If an oil companies has a reserve replacement rate at less than 100% for a long period of time, that is a huge warning bell. Reviewing five years of history, the only oil supermajor that had a reserve replacement rate of less than 100% is BP, and that is because it had to sell off assets after its oil spill (read: it had to address a one-time event).
As for alternative energy, look at what happened when natural gas emerged. The Big Oil companies just gobbled up the trillions of cubic feet of natural gas, collectively. Exxon and Chevron have tens of billions of dollars in cash on hand. That doesn’t just disappear overnight. When solar energy, windmills, or whatever become viable competitors to “old energy”, which companies do you think will gobble them up? I’ll give you a hint. It ain’t gonna be Tim’s Lemonade Stand. It’s going to be the energy companies with billions of dollars of cash on hand, ready to pounce. There is a reason why they have been rebranded as “energy” companies instead of “oil” companies.
In my opinion, the sensible way for an income investor to approach energy investing is to buy each of the supermajors, and make each one 2-4% of your portfolio, with a target of having 15% or so of your net wealth in Big Energy. They provide great and reliable income streams. Feel free and take those dividends and deploy them elsewhere. It’s like having your own little oil way you can tap for cash every ninety days.