Predicting the 2024 Energy Stock Gainers: XOM vs. VLO

Yesterday, oil prices surged by 1% following Iran's seizure of an oil tanker near Oman's coast, intensifying concerns over heightened Middle East tensions. Brent futures climbed 61 cents to $77.41 a barrel, and U.S. West Texas Intermediate (WTI) crude rose by 65 cents, settling at $72.02, indicating potential geopolitical risks.

Anticipating a future surge in oil prices, I examined two energy stocks, Exxon Mobil Corporation (XOM) and Valero Energy Corporation (VLO), to ascertain which holds greater potential for superior gains in 2024. Prior to evaluating these stocks, let's delve into the factors influencing oil prices.

In the Middle East, Iran retaliated by seizing a tanker carrying Iraqi crude bound for Turkey in response to last year's U.S. confiscation of the same vessel and its oil. The seizure of the Marshall Islands-flagged St. Nikolas aligns with ongoing attacks by Yemen's Iran-backed Houthi militias, focusing on Red Sea shipping routes.

This week, Yemen's Houthi rebels executed their most extensive assault on commercial shipping routes in the Red Sea. In a pivotal naval confrontation, the British and U.S. navies intercepted a substantial barrage of drones and missiles, effectively securing the safety of the Red Sea shipping routes.

The Iranian-backed Houthis launched an attack despite the imminent United Nations Security Council vote, aiming to condemn and demand an immediate cessation of their assaults. The rebels assert that their actions target Israel’s offensive against Hamas in the Gaza Strip.

Oil prices surged in response as the United States warned Houthi militants against further Red Sea attacks, and OPEC pledged to maintain unity in supporting prices. Simultaneously, protests in Libya prompted the closure of the Sharara oil field, which is responsible for a daily output of 300,000 barrels.

The U.S. Energy Information Administration (EIA) reports that mounting tensions in the pivotal Red Sea shipping channel and other Middle East developments have been applying upward pressure on prices since early December.

Should these tensions endure or escalate, there exists the possibility of disrupting global oil trade flows and prompting a more pronounced surge in global oil prices.

Meanwhile, Goldman Sachs (GS) has issued a cautionary warning, indicating that Houthi rebel disruptions extending to the Straits of Hormuz could lead oil prices to rise substantially. Furthermore, a month-long disruption in the Strait of Hormuz could trigger a 20% rise, with the potential for doubling if the disruption persists.

Both XOM and VLO are expected to capitalize on the industry’s developments. In terms of price performance, XOM has declined 1% over the past month, while VLO gained 3.7% during the same period. Moreover, XOM witnessed a 6.9% plunge over the past six months, while VLO climbed 10.4% over the same duration.

However, XOM plummeted 11.4% over the past year, closing the last trading session at $98.67, whereas VLO declined 4.2% during the same period, closing the last trading session at $128.00.

But which Energy - Oil & Gas stock could be a better pick? Let's find out.

Recent Developments

On November 14, 2023, XOM commenced production at Payara, Guyana's third offshore oil development, elevating total output to 620,000 barrels per day. The upcoming Prosperity FPSO vessel, targeting 220,000 barrels daily in the first half of 2024, marks a crucial expansion in XOM's revenue streams, fortifying its financial position.

The additional capacity and new wells coming online substantiate an escalating revenue stream, contributing to a progressive expansion in XOM's finances. This move positions XOM for heightened market influence and fortifies its stance as a leading player in the global energy landscape.

In its fiscal 2023 third-quarter release, VLO reported that the Sustainable Aviation Fuel (SAF) project at the DGD Port Arthur plant, slated for completion in 2025, will significantly benefit the company. The initiative affords the DGD plant the capability to upgrade about 50% of its current 470-million-gallon renewable diesel annual production capacity to SAF.

Upon project completion, VLO stands to gain prominence as one of the world's leading sustainable aviation fuel manufacturers, enhancing its market position and contributing to future growth opportunities in the renewable energy sector.

Recent Financial Results

For the fiscal 2023 third quarter that ended September 30, 2023, XOM’s total revenues and other income decreased 19% year-over-year to $90.76 billion. Net income attributable to XOM and earnings per common share declined 53.9% and 49% from the prior year’s period to $9.07 billion and $2.27, respectively.

Contrarily, as of September 30, 2023, the company’s current assets stood at $101.14 billion, compared to $97.63 billion as of December 31, 2022.

For the fiscal 2023 third quarter that ended September 30, 2023, VLO’s revenues came in at $38.40 billion. Its operating income stood at $3.50 billion. During the same quarter, adjusted net income attributable to VLO stockholders stood at $2.62 billion, while adjusted earnings per common share stood at $7.49, up 4.9% from the prior-year quarter.

Furthermore, as of September 30, 2023, the company’s current assets amounted to $26.58 billion, compared to $24.13 billion as of December 31, 2022.

Past Financial Performance

Over the past five years, XOM’s revenue and EBITDA increased at a CAGR of 4.9% and 10.7%, respectively. Moreover, its net income and EPS grew at a CAGR of 12.1% and 13.1%, respectively, over the same time frame.

VLO’s revenue and EBITDA rose at respective CAGRs of 6% and 23% over the past five years. Furthermore, its net income and EPS increased at a CAGR of 18.8% and 22.8% during the same period.

Valuation

In terms of forward P/E, VLO is trading at 5.21x, 51.8% lower than XOM, which is trading at 10.81x. In addition, VLO’s forward EV/Sales of 0.34x is 71.2% lower than XOM’s 1.18x. Furthermore, VLO’s forward EV/EBITDA of 3.44x compares with the XOM’s 5.63x.

Profitability

XOM’s trailing-12-month revenue is 2.4 times that of what VLO generates. However, VLO is more profitable, with a trailing-12-month ROCE, ROTA, and ROTC of 43.12%, 18.48%, and 24.68% compared with XOM’s 21.17%, 9.97%, and 13.53%, respectively. In addition, VLO’s trailing-12-month asset turnover of 2.37x compares with XOM’s 0.94x.

POWR Ratings

XOM has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. Conversely, VLO has an overall rating of B, translating to 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. XOM has a D grade for Value, justified by its higher-than-industry valuation. In terms of forward non-GAAP P/E and forward Price/Cash Flow, the stock is trading at 10.71x and 7.09x, 9% and 55.5% higher than the industry averages of 9.83x and 4.56x, respectively.

On the contrary, VLO has a B grade for Value, consistent with its lower-than-industry valuation. In terms of forward non-GAAP P/E and forward Price/Cash Flow, the stock is trading at 5.09x and 3.91x, 48.2% and 14.3% lower than the industry averages of 9.83x and 4.56x, respectively.

Of the 84 stocks in the Energy - Oil & Gas industry, XOM is ranked #45, while VLO is ranked #7. 

Beyond what we've stated above, we have also rated both stocks for Growth, Momentum, Stability, Sentiment, and Quality. Click here to view XOM’s ratings. Get all VLO ratings here.

The Winner

The current landscape of ongoing conflicts, including the seizure of tankers and Houthi rebel attacks, coupled with global reactions and supply disruptions, heightens volatility and the potential for further escalation in oil prices.

In this scenario, both XOM and VLO stand to benefit from the growth of oil prices. However, considering VLO's better valuation and superior track record, it positions itself as a more favorable investment choice over XOM at present.

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.

What To Do Next?

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XOM shares rose $1.25 (+1.27%) in premarket trading Friday. Year-to-date, XOM has declined -0.17%, versus a 0.23% rise in the benchmark S&P 500 index during the same period.

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.

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