Big Oil's Top Stock for 2011 (XOM, CVX, COP, RDS-A, BP, DIG, DUG)

How big oil stocks perform in 2011 will be highly dependent on the price of crude oil. That’s not a particularly original thought, but it remains true nonetheless. The price of crude fluctuated from below $65/barrel in May of this year to above $91/barrel in the past week. It’s no coincidence that shares in Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), and ConocoPhillips Corp. (NYSE: COP) posted new 52-week highs earlier this week. Royal Dutch Shell plc (NYSE: RDS-A) posted a 52-week high in early November, and BP plc (NYSE: BP) has still not recovered from the Gulf Oil spill although shares have jumped more than 60% since BP’s 52-week low in June.

We noted yesterday that the big oil companies are expected to spend more than $100 billion in exploration and production activities in 2011. The big jump reflects the companies’ expectations that prices will stay high, certainly above $80/barrel for 2011.

Here’s a short table showing the tickers, the current price, the mean target price from Thomson Reuters, the implied upside to that target, and the 52-week trading range.  We’ll add some color after the chart.

Exxon shares have gained about 7% in the past year, all of it in the past three months as crude prices have risen. That pretty much tells you all you need to know about Exxon stock. The largest US company by market cap requires big news to move the stock price much, and the only big news it will get is rising crude prices. Its acquisition of XTO Energy adds a lot of barrels of oil equivalent to its proved reserves, but low natural gas prices are likely to continue through 2011, effectively mitigating the impact of all that gas production.

Chevron, like Exxon, added materially to its natural gas reserves in 2010, but, also like Exxon, the payoff for those acquisitions will have to wait until natural gas prices approach $6/thousand cubic feet. Chevron’s cash flow from operations totaled nearly $8 billion in the third quarter and has been rising for four straight quarters. The company’s secret is that it depends more heavily on oil, and oil prices are rising, unlike natural gas prices.

ConocoPhillips shares have risen more than 30% in 2010, and the latest burst has put the company’s stock above mean price targets. The company’s P/E ratio for the past 12 months is 9.23, and the forward P/E is 10.56. The forward P/E is sure to rise as new price targets are issued, but a lot of upside remains in Conoco stock, which like Chevron, has seen cash flow from operations rise steadily.

Shell has the largest implied gain of any of the companies we’ve looked at here, with a 9.9% upside. That could be a little optimistic because Shell has come to depend more on natural gas production, and expects to produce more gas than oil in 2011. How that will help the company’s earnings is a mystery, although it could well be a brilliant long-term play.

BP’s potential upside is bounded by its exposure to lawsuits and other payments related to the explosion of its Macondo well in the Gulf of Mexico. The company’s shares have made a solid comeback since touching a low below $27/share in June. BP has taken nearly $40 billion in pre-tax charges to pay for the Gulf disaster and it has sold more than $22 billion worth of assets toward its commitment of raising $30 billion in cash. The company has suspended its dividend and if BP re-instates it, the payment is expected to be just half the $0.84/quarter it was earlier.

For those willing to take on some major risk, BP is the best bet for 2011. The risk, of course, is that damages from the Gulf spill will jump and overwhelm the company’s ability to pay. But 52-weeks ago BP shares stood at about $59/share and there’s no reason the company can’t get there again, based purely on its ability to produce oil. Unfortunately, producing oil isn’t the only thing BP has to pay attention to.

A safer bet in 2011 would be Chevron. It’s produces mostly oil and oil prices are not going to fall far, if they fall at all. Chevron offers a lot less risk than BP with an upside that is probably nearly as strong.

A quick look at a couple of ETFs could help focus things. The ProShares Ultra Oil & Gas ETF (NYSE: DIG) is long on oil and is up about 30% this year. The ProShares UltraShort Oil & Gas ETF (NYSE: DUG) is down more than -35% in the same period.

Betting on rising prices for crude has been gaining traction for the last few months, and it could continue well into next year. Demand from Asia, particularly China and India, will drive that price. US demand may increase a bit, but US consumption growth doesn’t move prices much any more.

Paul Ausick