AQR’s largest energy holding was Exxon Mobil Corporation (NYSE:XOM). AQR’s position in the stock was up 8% since the end of the first quarter. Exxon Mobil Corporation (NYSE:XOM) trades at an impressive trailing P/E of 9, and forward P/E of 11, despite its enormous size, high earnings growth in its most recent quarter compared to the same period the previous year, 2.6% dividend yield, and strong position in both oil and natural gas (the latter thanks to its acquisition of XTO Energy a few years ago). Perhaps surprisingly for a company so dependent on energy prices, Exxon Mobil’s beta is only 0.8.
Another oil major with a prime position in AQR’s portfolio was Chevron Corporation (NYSE:CVX), with the fund boosting its stake 4% to 1.6 million shares. Chevron has a similar profile to Exxon Mobil: large market cap of about $220 billion, trailing price-to-earnings ratio of 8, forward P/E of 9, and a dividend yield of 3.2%. Chevron’s business did shrink last quarter compared to the same quarter in 2011, and it does not have quite as strong a position in the market as Exxon Mobil, so it should trade at lower valuation multiples than the larger company. However, it too looks cheap. Adage Capital Management also reported a large position in Chevron at the end of June.
ConocoPhillips (NYSE:COP) is down 23% this year, but AQR has maintained a 1.3 million share position in this oil major as well. ConocoPhillips’s business is suffering even more than Chevron’s, as in its most recent quarter it reported a 17% fall in revenue and a 33% fall in earnings compared to a year ago; in addition, sell-side analysts expect 2013’s earnings per share to be barely above 2012’s. We don’t like seeing companies which can’t maintain their existing business; in order to buy in we’d prefer to see them trading at lower multiples, or expecting higher growth, than their larger peers. The 4.6% dividend yield is higher than Exxon Mobil or Chevron, but we still think the other two are better picks.
AQR slightly increased its holdings of Marathon Oil (NYSE:MRO) by 2% to finish the second quarter with 2.8 million shares in its portfolio. Marathon has good positions in unconventional energy, including shale and oil sands, and would be a big beneficiary of further advances in hydraulic fracturing technology. The company also markets liquefied natural gas, another possible growth vertical. Marathon took a heavy decline in earnings last quarter but looks fairly cheap on a forward basis, with sell-side earnings expectations implying a P/E of 8. The dividend yield here is only moderate- 2.5%- and it is the smallest of these four picks at a $19 billion market capitalization, but its strategic positioning and reasonable valuation multiples make it a potential addition to a portfolio.
We think that both supermajors are trading at value levels. Based on our analysis of other energy stocks, we think that BP (NYSE:BP) is better priced than either but Exxon Mobile and Chevron also make good choices, particularly if investors are leery of BP’s safety record or potential legal issues. At this point we’d prefer any of those three companies to Marathon, but we would keep an eye on that company’s growth in unconventional plays.
