Fuel Your Portfolio With These Three Petroleum Stocks
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three petroleum stocks. With gas prices reaching a new all-time high in March, should you consider these three petroleum stocks of Chevron Corp., Shell PLC and Exxon Mobil Corp.?
Petroleum Stocks Recent News
Since the price of gas dropped below $2 per gallon at the beginning of the coronavirus pandemic, prices have been rising quickly as consumer demand returns to normal. The Russia-Ukraine conflict has not helped either, as gas prices have skyrocketed since the invasion. At its peak in March 2022, a barrel of oil cost over $120. Russia is the third-largest producer of oil in the world and the vast sanctions placed on the country have raised concerns as to just how high gas prices could get.
Natural gas has also seen drastic increases in prices as a result of the Russia-Ukraine conflict. For the year, U.S. natural gas prices are now up 108%, which is adding to inflationary concerns across the economy. The move is less extreme than in Europe, where natural gas futures have risen to record levels as the European bloc scrambles to move away from dependence on Russian energy. The U.S. is now sending record amounts of liquefied natural gas (LNG) to Europe, which is lifting prices of Louisiana’s Henry Hub pipeline (the official delivery location for futures contracts on the New York Mercantile Exchange).
In recent years, petroleum companies have faced pressure due to the increased push toward clean energy. With a broadening decarbonization mandate across industries, companies have an opportunity to lead the way for customers by fully reengineering traditional oil field service (OFS) business models and solutions outside the traditional OFS and to other industries. Some companies have turned to technology by making big bets on cloud and edge computing, whose rate of growth is expected to outpace that of the oil and gas business in a few years. Partnerships with tech companies are becoming increasingly common, with the low-carbon and new energy rationale being a dominant driver.
The widespread adoption of electric vehicles (EVs) also poses a threat to petroleum companies. The accelerated energy transition is driving faster adoption of EVs, which could account for 50% of new passenger vehicle sales in the U.S. by 2030 if President Biden’s goal is met. Some automakers such as Volkswagen have pledged to stop selling gas-powered cars in Europe by 2035. Apart from the disruption created by the electrification of transportation, traditional fuels (diesel and gasoline) also face competition from other low-emission fuels, such as hydrogen and renewable fuels.
Overall, the oil and gas industry has rebounded strongly since the beginning of the coronavirus pandemic, with oil prices reaching their highest level in six years and gas prices reaching all-time highs. While the industry’s recovery is better than expected, there still remains uncertainty over market dynamics in the coming years. The rapid shift to clean energy poses a serious threat to petroleum companies, and it will be vital that they adapt to these changes in the coming years.
Grading Petroleum Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is one reason why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three petroleum stocks — Chevron, Shell and Exxon Mobil — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Petroleum Stocks
What the A+ Stock Grades Reveal
Chevron Corp. (CVX) manages its investments in subsidiaries and affiliates, and provides administrative, financial, management and technology support to the U.S. and international subsidiaries that engage in integrated energy and chemicals operations. The company operates through two business segments: upstream and downstream. The upstream segment consists primarily of exploring for, developing and producing crude oil and natural gas; processing, liquefaction, transportation and regasification associated with liquefied natural gas; transporting crude oil by international oil export pipelines; transporting, storage and marketing of natural gas; and a gas-to-liquids plant. The downstream segment consists primarily of refining crude oil into petroleum products; marketing of crude oil, refined products and lubricants; manufacturing and marketing of renewable fuels; transporting of crude oil and refined products; and manufacturing and marketing of commodity petrochemicals. Chevron is the second-largest oil company in the U.S. with production of 3.1 million barrels of oil equivalent (BOE) per day, including 7.7 million cubic feet of natural gas per day and 1.8 million barrels of liquids per day.
Chevron has an A+ Growth Grade of A. The growth grade considers both the near- and longer-term historical growth in revenue, earnings per share and operating cash flow. The company reported fourth-quarter 2021 revenues of $45.86 billion, up nearly 85% from $24.84 billion in the year-ago quarter. The company’s quarterly diluted earnings per share were $2.63, up from a loss of $0.35 per share year over year. Operating cash flows were $9.46 billion, up from $2.24 billion in the prior-year quarter.
Chevron has a Momentum Grade of A, based on its Momentum Score of 94. This means that it ranks in the top tier of all stocks in terms of its weighted relative strength over the last four quarters. This score is derived from a high relative price strength of 41.2% in the most recent quarter and 12.8% in the previous quarter offset by low relative price strengths of 8.9% and –9.5% in the three and four quarters ago, respectively. The scores are 94, 91, 76 and 41 sequentially from the most recent quarter. The weighted four-quarter relative price strength is 18.9%, which translates to a score of 94. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weighting of 20%.
The company has a Value Grade of C, based on its Value Score of 44, which is considered to be average. This is derived from a strong shareholder yield of 3.1% and a slightly expensive price-to-free-cash-flow ratio of 30.1, which ranks in the 65th percentile.
Shell PLC (SHEL) is an international energy and petrochemical company. The company is engaged in the exploration, production, refining and marketing of oil and natural gas, and the manufacturing and marketing of chemicals. Its businesses include upstream, integrated gas, renewables and energy solutions and downstream. Its upstream organization manages the exploration for and extraction of crude oil, natural gas and natural gas liquids. Shell’s integrated gas organization manages its liquefied natural gas activities and the production of gas-to-liquid fuels and other products. Renewables and energy solutions include hydrogen, power from renewable and low-carbon sources such as wind, solar and natural gas. Its downstream organization manages different chemicals and products activities as part of an integrated value chain that trades and refines crude oil and other feedstocks into a range of products that are moved and marketed around the world.
The company has a Value Grade of A, based on its Value Score of 11, which is considered to be deep value.
Shell’s Value Score ranking is based on several traditional valuation metrics. The company has a score of 15 for shareholder yield, 16 for the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA) and 22 for the price-to-sales (P/S) ratio (remember, the lower the score the better for value). The company has a shareholder yield of 4.2%, an EV/EBITDA ratio of 5.0 and a 0.84 price-to-sales ratio. A lower price-to-sales ratio is considered better, and Shell’s price-to-sales ratio is well below the sector median of 1.84. Every valuation metric for Shell is better than the industry average, including the price-to-free-cash-flow ratio (the lower the better) and price-to-earnings (P/E) ratio.
The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above along with the price-to-book-value ratio.
The company has a very strong Momentum Grade of A with a score of 89, driven by strong relative price strength in two of the last four quarters. Shell also has a strong Growth Score of 72, with a quarterly earnings growth score of 96, largely offset by a score of 31 for the five-year sales growth rate. The company currently has a dividend yield of 3.1%.
Exxon Mobil Corp. (XOM) is engaged in the energy business. The company’s principal business involves exploration for, and production of, crude oil and natural gas, and the manufacture, trade, transport and sale of crude oil, natural gas, petroleum products, petrochemicals and a range of specialty products. The company’s segments include upstream, downstream and chemical. The upstream segment is organized and operates to explore for and produce crude oil and natural gas. The downstream segment manufactures, trades and sells petroleum products. The refining and supply operations encompass a global network of manufacturing plants, transportation systems and distribution centers that provide a range of fuels, lubricants and other products and feedstocks to its customers around the world. The chemical segment is organized and operates to manufacture and sell petrochemicals. The chemical business supplies olefins, polyolefins, aromatics and a variety of other petrochemicals. Exxon Mobil is the world’s largest refiner, with a total global refining capacity of 4.6 million barrels of oil per day, and one of the world’s largest manufacturers of commodity and specialty chemicals.
Earnings estimate revisions offer an indication of how analysts are viewing the short-term prospects of a firm. Exxon Mobil has an Earnings Estimate Revisions Grade of C, which is considered neutral. The grade is based on the statistical significance of its last two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Exxon Mobil reported a positive earnings surprise for fourth-quarter 2021 of 5.8%, and in the prior quarter reported a positive earnings surprise of 1.3%. Over the last month, the consensus earnings estimate for the first quarter of 2022 has increased from $2.005 to $2.071 per share due to six upward and three downward revisions. Over the last three months, the consensus earnings estimate has increased 31.5%, from $1.575 per share.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the quality grade shows that stocks with higher quality grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
Exxon Mobil has a Quality Grade of A with a score of 93. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a quality score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The company ranks strongly in terms of its Z double prime score and F-Score. Exxon Mobil has a Z double prime score of 8.75 and an F-Score of 8. The ranges for a firm’s Z double prime score are: Below 1.8 indicates a firm is headed for financial distress, above 3.0 indicates a firm is unlikely to enter bankruptcy. The F-Score is a number between zero and nine that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company. However, Exxon Mobil ranks poorly in terms of its return on invested capital (net operating profit after tax divided by total invested capital), in the 41st percentile.
Exxon Mobil has a Growth Grade of B, based on its Growth Score of 76, which is considered strong. This is based on high quarterly sales and year-over-year operating cash growth scores of 86 and 96, respectively. The company has an average Momentum Grade of A, with a score of 92. The company currently has a dividend yield of 4.0% which is in the 93rd percentile of all stocks.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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