Petroleum and Oil Companies: High Demand Unmet by Supply
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three petroleum stocks that are struggling to keep up with an ongoing demand surge due to supply disruptions. For investors focused on opportunities in this industry, should you consider the three petroleum stocks of Chevron Corp., Exxon Mobil Corp. and Occidental Petroleum Corp.?
Petroleum Stocks Recent News
In recent weeks, people all over the world and certainly in the U.S. have felt the supply shock of oil disruptions. Gasoline prices have reached levels unseen in the U.S. since 2014, with the country’s average price per gallon at $3.32 as of Tuesday, October 19. This price is up $0.095 from a month ago and is $1.10 higher than a year ago according to fuel savings app GasBuddy. The state with the highest per-gallon gas prices is California at an average of $4.45 per gallon, while the lowest is Texas at $2.92 per gallon. With these high prices, you may want to consider apps such as GasBuddy, Gas Guru and AAA TripTik to find the best gas prices in your area.
Global demand for oil is high, yet supply remains tight. The cost of crude oil per barrel continues to rise, with the Brent crude benchmark rising to $85.08 per barrel, and U.S. West Texas Intermediate (WTI) futures reaching $82.96 per barrel. Oil futures are near multi-year highs as this energy supply crunch persists around the globe. Prices have been climbing the last two months, with Brent and WTI gaining about 19% and 21% since the start of September, respectively. For comparison, in August the price per barrel was in the low $60 range. In the U.S. last week, crude oil stocks rose while gasoline and distillate inventories fell, according to sources citing American Petroleum Institute figures on October 19. Crude stocks rose by 3.3 million barrels for the week ended October 15. Gasoline inventories fell by 3.5 million barrels and distillate stocks fell by 3 million barrels, according to the data.
As the Northern Hemisphere winter approaches, increased demand for oil, coal and natural gas has increased prices around the world, and demand is likely to remain elevated. Cold weather has begun to grip China, and the resulting power crunch has hurt Chinese economic growth, which fell to its lowest level in a year on Monday. China’s daily crude oil processing rate also declined last month, dropping to its lowest level since May of last year. Additionally, Russian firm Gazprom has set record sales in 2021 despite not raising natural gas supplies to Europe, while Brazilian fuel distributor Petrobras is set to miss the atypical demand that has surpassed its production capacity and is likely to cause shortages in the country.
Some analysts believe that the oil price rally could unsettle the stock market and that the 10% makeup of oil stocks in the S&P 500 index causes trouble for the remaining 90% of index constituents. Industries such as the airlines and others related to travel and leisure have performed incredibly strong, whereas typically the two broader industries have an inverse relationship. Overall, oil production must increase to meet the increased demand during the pandemic recovery. If not, higher prices could be in store, which would be the lose-lose situation many fear.
Grading Petroleum Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is useful 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, Exxon Mobil and Occidental Petroleum — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Petroleum Stocks
What the A+ Stock Grades Reveal
Chevron Corp. (CVX) is an integrated energy company with exploration, production and refining operations worldwide. Chevron is the second-largest oil company in the U.S. with production of 3.1 million of barrels of oil equivalent a day, including 7.3 million cubic feet a day of natural gas and 1.9 million of barrels of liquids a day. Production activities take place in North America, South America, Europe, Africa, Asia and Australia. Its refineries are in the U.S. and Asia for total refining capacity of 1.8 million barrels of oil a day. Proven reserves at year-end 2020 stood at 11.1 billion barrels of oil equivalent, including 6.1 billion barrels of liquids and 29.9 trillion cubic feet of natural gas. The company operates through two business segments: upstream and downstream. Upstream operations consist 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; processing, transporting, storage and marketing of natural gas; and a gas-to-liquids plant. Downstream operations consist primarily of the refining of crude oil into petroleum products; marketing of crude oil, refined products and lubricants; transporting of crude oil and refined products; and manufacturing and marketing of commodity petrochemicals.
Earnings estimate revisions offer an indication of what analysts are thinking about the short-term prospects of a firm. The company 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.
The company reported a positive earnings surprise last quarter, and two quarters ago reported earnings was in line with the estimate. Over the last month, the consensus earnings estimate for the third quarter has increased from $2.105 to $2.206 per share based on 10 upward and three downward revisions. Three months ago, the consensus earnings estimate was $1.69 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.
Chevron has a Quality Grade of C. 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 strong in terms of its Z double prime bankruptcy risk (Z) score and F-Score, ranking in the 73rd percentile of all U.S.-listed stocks for both components. However, it ranks poorly in terms of its return on invested capital (ROIC), putting it in the 11th percentile.
Chevron has a Momentum Grade of B, based on its Momentum Score of 64, and an average Growth Grade of C. The company has a 4.8% dividend yield.
Exxon Mobil Corp. (XOM) is an integrated oil and gas company that explores for, produces and refines oil around the world. In 2020, it produced 2.3 million barrels of liquids and 8.5 billion cubic feet of natural gas per day. At the end of 2019, reserves were 15.2 billion barrels of oil equivalent, 58% of which were liquids. The company is the world’s largest refiner with a total global refining capacity of 4.8 million barrels of oil per day and is one of the world’s largest manufacturers of commodity and specialty chemicals. The company’s segments include upstream, downstream, chemical and corporate and financing. The upstream segment explores for and produces crude oil and natural gas. The downstream segment manufactures, trades and sells petroleum products. The refining and supply operations consist of 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 manufactures and sells petrochemicals. The chemical business supplies olefins, polyolefins, aromatics and a variety of other petrochemicals.
Exxon Mobil has an A+ Growth Grade of C. The growth grade considers both the near- and longer-term historical growth in revenue, earnings per share and operating cash flow. The company reported second-quarter revenues of $65.9 billion, up 104.3% from $32.3 billion in the year-ago quarter. The company reported quarterly diluted earnings per share of $1.10. Exxon Mobil has a 5.6% dividend yield.
Exxon Mobil has a Momentum Grade of B, based on its Momentum Score of 74.
Occidental Petroleum Corp. (OXY) is an independent exploration and production company with operations in the U.S., Latin America and the Middle East. At the end of 2020, the company reported net proved reserves of 2.9 billion barrels of oil equivalent. Net production averaged 1,306 thousand barrels of oil equivalent per day in 2020 at a ratio of 74% oil and natural gas liquids and 26% natural gas. The company’s business segments include oil and gas, chemical and midstream and marketing. The oil and gas segment explores, develops and produces oil and condensate, natural gas liquids (NGL) and natural gas. The chemical segment manufactures and markets basic chemicals and vinyls. The midstream and marketing segment purchases, markets, gathers, processes, transports and stores oil, condensate, NGL, natural gas, carbon dioxide (CO2) and power. It also trades around its assets, including transportation and storage capacity, and invests in entities that conduct similar activities.
Occidental Petroleum has a Value Grade of B, based on its Value Score of 35, which is considered to be value. The company’s Value Score ranking is based on several traditional valuation metrics. The company has a score of 21 for the price-to-free-cash-flow ratio, 57 for shareholder yield and 32 for the price-to-sales ratio (remember, the lower the score the better for value). Successful stock investing involves buying low and selling high, so stock valuation is an important consideration for stock selection.
The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above along with the price-earnings, price-to-book and enterprise-value-to-EBITDA ratios.
Occidental Petroleum has a Momentum Grade of A, based on its Momentum Score of 91. This means that it ranks in the top tier of all stocks in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters.
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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