Oil has been a hot topic lately, ever since Saudi Arabia's move to extend its reduction of crude oil production by 1 million barrels per day is anticipated to further intensify the upward push on oil prices. Additionally, the increasing demand emanating from the electric power sector is set to drive expansion in the natural gas industry.
Given the backdrop, let's examine the fundamentals of energy stocks Exxon Mobil Corporation (XOM), Chevron Corporation (CVX), and Valero Energy Corporation (VLO) to understand which could be a better buy now.
Saudi Arabia, a major oil-producing nation that heavily relies on oil revenues to finance its ambitious large-scale economic projects, recently extended its voluntary oil production reduction of 1 million barrels per day until the end of the year to secure higher oil prices. Furthermore, Russia has also pledged to decrease its oil exports by 300,000 barrels per day until December 2023.
After the declaration of these extended production cuts, WTI October contracts saw a substantial increase, reaching $86.75 per barrel, while Brent November contracts climbed to $90.05 per barrel. These price levels represent the highest seen in the past ten months for both types of crude oil.
Moreover, in certain regions, oil inventories are starting to decline as demand outpaces supply, primarily caused by significant production cuts by OPEC leader Saudi Arabia. This scenario is offering support to oil prices, and prices are anticipated to continue to rise in the upcoming months.
Additionally, the decrease in oil inventory has not been uniform across regions. While inventory levels have dwindled in the United States and Europe, they have simultaneously risen in China and Japan.
Furthermore, given the declining inventories and constrained supply, especially as OPEC+ production approaches its lowest point in nearly two years, UBS predicts oil prices to rally beyond $90 per barrel by the year-end.
On the other hand, the natural gas sector is expanding due to global economic activity, increased electricity demand, and rising petroleum needs in developing nations. Growing natural gas utilization in the electric power sector is a key growth driver.
The global natural gas market is projected to grow at a 7.3% CAGR and reach $1.03 trillion in 2023. Looking ahead, the market is expected to hit $1.37 trillion by 2027, exhibiting a CAGR of 7.5% spanning 2023 to 2027.
Given the industry dynamics, let us dive into the fundamentals of the three Energy - Oil & Gas stocks, beginning with the number three.
Stock #3: Exxon Mobil Corporation (XOM)
XOM explores and produces crude oil and natural gas. It also manufactures, trades, transports, and sells petroleum products, petrochemicals, and specialty products. The company operates through four segments, Upstream; Energy Products; Chemical Products; and Specialty Products.
On July 13, XOM entered into a definitive agreement to acquire Denbury Inc. (DEN), a company with a proven track record in developing carbon capture, utilization, and storage (CCS) solutions and enhanced oil recovery. The acquisition of DEN is expected to yield significant synergies, driving strong growth and returns for XOM.
It provides XOM with the largest owned and operated CO2 pipeline network in the United States, spanning 1,300 miles, with approximately 925 miles located in key regions of Louisiana, Texas, and Mississippi. Additionally, this acquisition also includes ten strategically positioned onshore sequestration sites.
On March 16, XOM officially launched its Beaumont refinery expansion project, boosting its capacity by 250,000 barrels per day. This expansion project enhances one of the largest refining and petrochemical complexes on the U.S. Gulf Coast.
It is facilitated by XOM’s increased crude production in the Permian Basin and represents the most significant refinery expansion in over ten years. The aim is to address the rising need for accessible and dependable energy.
XOM’s trailing-12-month ROTA of 14.24% is 76.6% higher than the 8.06% industry average. Whereas the stock’s trailing-12-month EBITDA margin of 22.76% is 42.6% lower than the 39.65% industry average.
For the second quarter that ended June 30, 2023, XOM’s total revenues and other income came in at $82.91 billion, while the company’s attributable net income and EPS amounted to $7.88 billion and $1.94, down 55.9% and 53.9% from the prior-year quarter, respectively.
However, as of June 30, 2023, the company’s total current liabilities stood at $61.82 billion, compared to $69.05 billion as of December 31, 2022.
Analysts expect XOM’s EPS for the third quarter (ending September 2023) to decline 50.7% year-over-year to $2.19. However, the company topped its EPS estimates in three of the trailing four quarters, which is promising.
Over the past year, XOM’s shares have surged 22.1% to close the last trading session at $116.44.
XOM’s POWR Ratings are consistent with this outlook. It has an overall rating of C, translating to Neutral in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #41 out of 87 stocks in the Energy - Oil & Gas industry. It has a C grade for Stability. Click here to see XOM’s additional ratings for Growth, Value, Momentum, Sentiment, and Quality.
Stock #2: Chevron Corporation (CVX)
CVX manages investments in subsidiaries and affiliates and provides administrative, financial, and technological support to the United States and international subsidiaries involved in integrated energy and chemicals operations. The company’s segments include Upstream and Downstream.
On September 12, CVX, through its Chevron New Energies division, completed the acquisition of Magnum Development, LLC, and a majority interest in ACES Delta, LLC, a joint venture with Mitsubishi Power Americas, Inc. ACES Delta is developing the Advanced Clean Energy Storage project in Delta, Utah, which will use electrolysis to convert renewable energy into hydrogen and store it in salt caverns for seasonal, dispatchable energy storage.
CVX aims to contribute to lower carbon energy solutions by leveraging this hydrogen project in the western United States for various sectors, including utilities, transportation, and industry.
August 7, CVX announced the successful completion of its acquisition of PDC Energy, Inc. Commenting on this, Bruce Niemeyer, CVX’s president for Americas Exploration & Production, said, “We’re pleased to welcome PDC Energy into Chevron, our companies have similar cultures, with a focus on safe and reliable operations, teaming to deliver results, and benefiting the communities where we operate. PDC’s high-quality assets open up even greater opportunities in important U.S. basins where Chevron already has a strong presence.”
CVX’s trailing-12-month levered FCF margin of 10.90% is 67.3% higher than the 6.52% industry average. Whereas the stock’s trailing-12-month EBITDA margin of 24.04% is 39.4% lower than the 39.65% industry average.
For the second quarter that ended June 30, 2023, CVX’s total revenues and other income came in at $48.89 billion, while the company’s attributable net income and EPS amounted to $6.01 billion and $3.20, down 48.7% and 46.2% from the prior-year quarter, respectively. In addition, its cash and cash equivalents stood at $9.29 billion during the same period.
Street expects CVX’s revenue for the third quarter (ending September 2023) to decline 26% year-over-year to $49.30 billion. However, the company surpassed its revenue estimates in each of the trailing four quarters, which is impressive.
CVX’s shares plunged 7.4% year-to-date but gained 4.9% over the past three months to close the last trading session at $166.20.
CVX has an overall C grade, which translates to Neutral in our POWR Ratings system.
It also has a C grade for Stability and Sentiment. Within the same industry, it is ranked #35. Beyond what we stated above, we also have given CVX’s grades for Growth, Value, Momentum, and Quality. Get all the CVX ratings here.
Stock #1: Valero Energy Corporation (VLO)
VLO manufactures, markets, and sells transportation fuels and petrochemical products worldwide. It operates through three segments: Refining; Renewable Diesel; and Ethanol. The company produces CARB diesel, diesel, jet fuel, asphalt, aromatics, and sulfur crude oils.
On September 5, VLO paid its shareholders a quarterly dividend of $1.02 per share. The company’s annual dividend of $4.08 translates to a 2.80% yield on the prevailing prices, while its four-year average dividend yield is 4.88%.
Its dividend payouts have grown at CAGRs of 1.7% and 5.4% over the past three and five years, respectively.
On January 31, VLO and Darling Ingredients Inc. jointly announced their final investment decision on a Sustainable Aviation Fuel (SAF) project at the DGD Port Arthur plant, which is operated by Diamond Green Diesel Holdings LLC, a 50/50 joint venture between VLO and Darling.
Upon its completion by 2025, the project will upgrade around 50% of the plant’s current 470-million-gallon annual production capacity to produce SAF. As a result, DGD is expected to become one of the world’s leading manufacturers of SAF.
VLO’s trailing-12-month ROCE of 46.57% is 115.9% higher than the 21.57% industry average. Its trailing-12-month ROTC of 25.08% is 136.6% higher than the industry average of 10.60%. Furthermore, the stock’s trailing-12-month cash per share of $14.37 is significantly higher than the industry average of $0.67.
For the second quarter, which ended on June 30, 2023, VLO’s revenues amounted to $34.51 billion, while its operating income stood at $2.76 billion. During the same period, the company’s attributable net income and EPS came in at $2.76 billion and $5.41, respectively.
Also, its cash and cash equivalents amounted to $5.08 billion, increasing 4.4% compared to $4.86 billion as of December 31, 2022.
The consensus EPS estimate of $7.19 for the third quarter (ending September 2023) represents a marginal improvement year-over-year. While the consensus revenue estimate for the same period is $39.84 billion. Moreover, the company has an excellent earnings surprise history, surpassing the EPS estimates in each of the trailing four quarters.
The stock has gained 30.7% over the past year and 28.7% over the past three months to close the last trading session at $145.48.
It’s no surprise that VLO has an overall rating of B, which equates to Buy in our proprietary rating system. It has a B grade for Value, Momentum, and Quality. Out of 87 stocks in the same industry, it is ranked #4.
In addition to the POWR Ratings we’ve stated above, we also have VLO’s ratings for Growth, Stability, and Sentiment. Get all VLO ratings here.
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XOM shares were trading at $118.41 per share on Thursday afternoon, up $1.97 (+1.69%). Year-to-date, XOM has gained 10.01%, versus a 18.59% 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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