Supply constraints, coupled with bullish oil demand forecasts from both the International Energy Agency (IEA) and OPEC for this year, are expected to drive oil prices higher. Meanwhile, apprehensions regarding heightened U.S. engagement amid escalating geopolitical tensions in the Middle East are fueling increased volatility in the energy market.
With these factors in mind, in this piece, I have compared the fundamentals of two industry players, Occidental Petroleum Corporation (OXY) and Valero Energy Corporation (VLO), to determine which one could be a better addition to your portfolio.
However, before we dive deeper into the fundamentals of the aforementioned stocks, let’s briefly examine the industry dynamics.
The IEA anticipates that global oil consumption will surge by 1.24 million barrels per day (bpd) in 2024, up 180,000 bpd from its previous projection, marking the third consecutive upward adjustment in its forecast. This upward trend is fueled by the improving global economic growth and the expanding petrochemicals sector in China.
In contrast, OPEC foresees a larger uptick in global oil demand, projecting a 2.25 million bpd increase for 2024, followed by an additional surge of 1.80 million bpd in 2025, largely driven by the strengthening Chinese economy.
Moreover, last week witnessed a notable surge in geopolitical tensions in the Middle East, sparked by a deadly drone strike in Jordan. This tragic incident has raised heightened concerns over increased U.S. involvement in the ongoing conflict in the region. As a result, oil prices experienced a significant spike, fueled by market speculation regarding the potential U.S. response to the drone attack.
Given the prevailing favorable industry outlook, both OXY and VLO should benefit. However, VLO appears to be a clear winner in terms of price performance. Over the past six months, VLO’s shares have rallied 9.9%, while OXY’s shares plunged 5.1%. Likewise, over the past three months, VLO’s shares have surged 14.2% compared to OXY’s 4.5% drop during the same period.
Moreover, VLO’s shares have soared 9.2% over the past month to close the last trading session at $141.89. In contrast, OXY’s shares have tumbled 1.4% over the past month to close the last trading session at $58.90.
However, to find out which Energy - Oil & Gas stock could be the ideal buy, let’s dig deeper into their fundamentals:
Recent Developments
On December 11, 2023, OXY disclosed its agreement to acquire CrownRock L.P., an oil and gas producer headquartered in Midland. The strategic alignment between OXY and CrownRock is anticipated to further strengthen OXY's prominent Permian portfolio by incorporating roughly 170 thousand barrels of oil equivalent per day (Mboed) of high-margin, lower-decline unconventional production in 2024.
Furthermore, it introduces approximately 1,700 undeveloped locations into OXY’s asset base.
Conversely, On January 18, 2024, VLO declared a quarterly dividend of $1.07 per share, payable to its shareholders on March 4, 2024. This dividend reflects a 5% rise from the previous quarter's dividend.
The company’s annual dividend of $4.28 translates to a 3.09% yield on the prevailing price, while its four-year average dividend yield is 4.28%. Its dividend payouts have grown at CAGRs of 1.3% and 4.9% over the past three and five years, respectively.
Recent Financial Results
OXY’s total revenue and other income for the fiscal third quarter (ended September 30, 2023) declined 22% year-over-year to $7.40 billion. Meanwhile, its net income amounted to $1.37 billion and $1.20 per share, down 50% and 52.4% from the prior-year quarter, respectively.
During the same quarter, the company’s cash and cash equivalents stood at $611 million, declining 37.9% compared to $984 million as of December 31, 2022.
For the fiscal fourth quarter, which ended on December 31, 2023, VLO’s revenues amounted to $35.41 billion, while its net income and EPS came in at $1.22 billion and $3.55, respectively. Additionally, during the same period, the company’s cash and cash equivalents stood at $26.22 billion, up 8.7% compared to $24.13 billion as of December 31, 2022.
Past and Expected Financial Performance
OXY’s revenue and EBITDA have grown at CAGRs of 13.1% and 20% over the past three years, respectively. Meanwhile, its total assets have declined at a 4.6% CAGR over the same time frame. Street expects OXY’s revenue and EPS for the fiscal 2024 first quarter (ending March 2024) to decline 3.3% and 22.2% year-over-year to $7.02 billion and $0.85, respectively.
Conversely, VLO’s revenue and EBITDA have improved at CAGRs of 34% and 162.5% over the past three years, respectively. In addition, its total assets grew at a 6.9% CAGR over the same period. Analysts predict VLO’s revenue and EPS for the fiscal 2024 first quarter (ending March 2024) to come in at $31.31 billion and $2.71, respectively.
Profitability
VLO’s trailing-12-month cash per share of $17.13 is significantly higher than OXY’s $0.70. Likewise, VLO’s trailing-12-month Return On Common Equity (ROCE) of 35.67% is higher than OXY’s 22.24%. Furthermore, VLO’s trailing-12-month Return On Total Assets (ROTA) of 13.98% is higher than OXY’s 7.55%.
Thus, VLO is more profitable.
Valuation
In terms of the forward EV/Sales ratio, OXY’s 2.81x is 585.4% higher than VLO’s 0.41x. Likewise, OXY’s forward Price/Sales ratio of 1.81x is 417.1% higher than VLO’s 0.35x. Furthermore, OXY’s forward Price/Book multiple of 2.47 is 46.2% higher than VLO’s 1.69.
Thus, VLO is more affordable.
POWR Ratings
OXY has an overall rating of D, which equates to a Sell in our proprietary POWR Ratings system. Conversely, VLO has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. OXY has a D grade for Value, justified by its stretched valuation metrics. In terms of the forward EV/Sales ratio, OXY’s 2.81x is 41.1% higher than the industry average of 1.99x. Likewise, OXY’s forward Price/Book ratio of 2.47x is 51.2% higher than the 1.63x industry average.
On the other hand, VLO’s B grade for Value is in sync with its discounted valuation metrics. In terms of the forward EV/Sales ratio, VLO’s 0.41x is 79.6% lower than the industry average of 1.99x. Similarly, the stock’s forward Price/Sales ratio of 0.35x is 74.9% lower than the 1.39x industry average.
Among the 82 stocks in the Energy - Oil & Gas industry, OXY is ranked #71, while VLO is ranked #9.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, Sentiment, and Quality. Click here to view OXY ratings. Get all VLO ratings here.
The Winner
Amid optimistic oil demand projections and a surge in oil prices due to heightened geopolitical tension, the energy sector's outlook shines brightly. Therefore, in this dynamic environment, both OXY and VLO stand to gain. However, VLO’s stronger financial position, higher profitability, and more favorable valuation could potentially position it as a superior investment compared to OXY.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Energy - Oil & Gas industry here.
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OXY shares were trading at $57.96 per share on Wednesday afternoon, down $0.94 (-1.60%). Year-to-date, OXY has declined -2.93%, versus a 2.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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