As the price differential between WTI and Brent crude oil continues to narrow, with WTI rising and Brent falling, big oil companies should see a gain in their realized prices for crude. This is especially true for companies with significant production in the US. Those gains, however, will be offset by higher input prices at the integrated companies’ refineries, which will no longer be able to take advantage of the price differential that allowed them to sell refined products from WTI as if the refinery inputs were Brent.

We’ve surveyed eight major oil companies, both integrated and E&P only, to try to find out where value in these stocks might be based on analysts’ target prices and implied upside on the stock. The companies we looked at are Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), ConocoPhillips Corp. (NYSE: COP), BP plc (NYSE: BP), Occidental Petroleum Corp. (NYSE: OXY), Marathon Oil Corp. (NYSE: MRO), Apache Corp. (NYSE: APA), and Petroleo Brasileiro SA (NYSE: PBR), more commonly known as Petrobras.

All data comes from Yahoo! Finance and MarketWatch, with current prices from about noon today.

Exxon Mobil Corp. (NYSE: XOM) has a median target price of $90.00 from 17 brokers. Shares are trading today at $79.31, for an upside potential of $10.69, or 13.5%. Exxon pays a dividend yield of 2.4% and its forward P/E is 9.38. Exxon’s upside is the second-lowest in this group, and is dragged down by the company’s expressed decision to retain its refining operations. Because refining is, at the best of times, cyclical and profitability depends largely on crude oil prices, the current upward movement in WTI pricing will affect the company’s refining margins.

In the third quarter, Exxon’s US refining profits totaled $810 million, up 79% from the third quarter of 2010. Non-US refining profits actually fell by -23% because the WTI/Brent differential did not affect overseas crude pricing.

Chevron Corp. (NYSE: CVX) has a median target price of $122.00 from 19 brokers. Shares are trading today at $101.88, for a potential upside of $20.12, or 19.8%. Chevron pays a dividend yield of 3.1% and its forward P/E is 7.91. Chevron, like Exxon, has rejected the option of hiving off its refinery operations, and also like Exxon, that decision will affect profits as refinery margins fall. In the third quarter, Chevron’s price differential between WTI and Brent crude averaged $17/barrel. As Brent prices fall due to resumed production from Libya and WTI prices rise, the differential will close further and the $2 billion in profit that Chevron made from its downstream operations will also decline. Fortunately for Chevron, the higher realized prices for its crude will offset a fair portion of that downstream drop-off.

ConocoPhillips Corp. (NYSE: COP) has a median target price of $80.00 from 17 brokers. Shares are trading today at $70.80, for an implied upside of $9.20, or 13%. Conoco pays a dividend yield of 3.7% and its foward P/E is 8.39. Conoco announced its intention to spin-off its refining operations into a separate company, but it may have waited too long to be able to set a premium price for its refineries. The company’s potential upside is the lowest of this group, and that is likely due to what investors see as a probable delay in the refinery spin-off or a decision by the company to go ahead with the deal at a less-than-desired price.

BP plc (NYSE: BP) has a median target price of $54.12 from 12 brokers. Shares are trading today at $43.23, for an implied upside of $10.96, or 25.4%. The company pays a dividend yield of 3.8%, the highest of this group, and its forward P/E is 6.58, the second-lowest in this group. While BP has managed to boost its share price by more than 60% from its low in June of 2010 following the Macondo well explosion that killed 11 workers and dumped 5 million barrels of crude into the Gulf of Mexico, investors remain wary of the company’s ability to put the disaster fully behind it. BP is also trying to sell two refineries, not to bolster its reserves, but simply to get rid of them. At the same time, it is upgrading its Indiana refinery to accept more crude from Canada’s oil sands.

Occidental Petroleum Corp. (NYSE: OXY) has a median target price of $115.00 from 19 brokers. Shares are trading today at $97.20, for an upside potential of $17.80, or 18.3%. The company pays a dividend yield of 1.9% and its forward P/E of 11.72. Because Oxy has no refining operations, it is insulated from the decline in refining margins. The company’s stock was upgraded recently from ‘neutral’ to ‘outperform’ with a target price of $135.00 by Credit Suisse. The company owns high-potential shale oil fields in California and other properties in Texas that will benefit from rising crude prices, without suffering any drag from refining.

Marathon Oil Corp. (NYSE: MRO) has a median target price of $33.00 from 18 brokers. Shares are trading today at $27.14, for an implied gain of $5.86, or 21.6%. The company pays a dividend yield of 2.2% and its forward P/E is 7.99. Marathon successfully spun-off 100% of its refining assets into a separate company, Marathon Petroleum Corp. (NYSE: MPC), in June this year. Marathon averaged 46,000 barrels/day of production from its Libyan assets in 2010. The company has not indicated when any part of that production will be back on-line, but a resumption should be just around the corner.

Apache Corp. (NYSE: APA) has a price target of $134.00 from 23 brokers. Shares are trading today at $100.87, for an upside potential of $33.13, or 32.8%. The company pays a dividend yield of 0.6% and its forward P/E is 8.3. Apache’s target price is a few pennies below its 52-week high, which may signal that the company is fully priced. Apache’s strongest point has been that it is able to sell about 75% of its production at Brent prices. As the price gap between WTI and Brent narrows, that won’t have a lot of impact on the company unless Brent should suddenly fall below WTI. Like Oxy and Marathon, Apache has no refining to concern itself with.

Petroleo Brasileiro SA (NYSE: PBR) has a median target price of $38.04 from 20 brokers. Shares are trading today at $27.28, for an upside potential of $10.76, or 39.4 %, the highest upside in this group. The company pays a dividend yield of 0.6% and its forward P/E is 6.42, both the lowest in this group. Petrobras is investing nearly $225 billion over the next few years to begin producing some 5 billion barrels of crude from the basins offshore of Brazil. In the third quarter, the company produced about 2.6 million barrels/day and expects to raise that total to 3 million barrels/day by the end of 2012. It will need to continue that level of production growth in order to keep up with the costs it will incur.

Of the eight companies in this group, the favorite probably has to be Apache, which has no refining operations and is able to sell the vast majority of its crude at the highest price available. Oxy is a strong second choice. The major integrated companies will feel the drag from their refineries, and Marathon needs to get its Libyan oil back online. As for Petrobras, it’s really a crapshoot at this point.

Paul Ausick

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