Time to Buy Big Oil

11/05/2009 1:19 pm EST

Focus: STOCKS

Jon Markman

Editor, Trader's Advantage

Jon Markman, commentator for MSN Money, calls the energy giants super bargains.

The profits of supersized energy companies have shrunk in the past year, as lower demand and lower prices have pushed revenue growth down to levels not seen in the past four years. But with crude oil stabilizing around $75 to $80 a barrel and recession around the world fading, it looks like the biggest companies in the world are about to get their mojo back.

Call it a return to quality or just a rebound of rationality: The likes of Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX) and ConocoPhillips (NYSE: COP) could be on the verge of reclaiming their rightful spot at the head of the investing table.

The question here is not why they might come back from the dead but why investors ever disrespected them in the first place.

Exxon Mobil executives over the past century-plus have created the world's most successful and profitable company, devoted to producing and selling the most important product in the world. Yet shares are still negative in this amazing year by 6.5%. And its closest peers have been mostly ignored during the market's rally. Conoco is up just 1% this year, while Chevron is up 5%.

Can this really continue? Probably not, and investors are already voting with their money for a switch into these leaders. Indeed, as the first stage of the 2009 bull market matures, it looks like the "dash for trash"—in which the worst companies' shares were purchased first and most avidly—will end. And in their place are likely to surge companies that have billions in profits and valuations that are as low as they have been in a decade.

I could give you a lot of fundamental reasons that Exxon deserves to move higher, of course. A declining dollar is good for oil prices. Higher emerging-market demand is good for oil prices… Plus, an improving US economy will demand more gasoline than expected, which also helps the integrated energy giants, which get a lot of their income from wholesale gasoline.

The shares are cheap. Exxon's trailing price-to-earnings multiple is a modest 11.7, quite a bit lower than the 13-to-15 multiple it was accorded from 2005 to 2008 or the 15-to-18 in 2003-04. And its earnings are in the process of turning around, so earnings growth over the near year should clock in at 10%.

For this to work, the economy has to firm up. So let me just remind you, in case it's not obvious, that the worldwide upswing in industrial production is still on track. As noted by the analysts over at ISI Group, just one year after every national economy on Earth was declining at the same time, every economy is now improving—though each is at its own pace.

If the great rally of 2009 moderates over the rest of the year as investors cash in their wins from low-quality stocks and invest them in high-quality stocks, big energy companies such as Exxon, Chevron and Conoco have the potential to do what they did in 2003: take the lead.

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