Three Oil Titans Fueled Amid Global Tensions
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three energy stocks. With recent geopolitical tensions affecting global energy markets, should you consider these three energy stocks of Exxon Mobil Corp. (XOM), Shell PLC (SHEL) and Suncor Energy Inc. (SU)?
Oil and Gas Stocks Recent News
Amid escalating tensions in the Middle East, the oil and gas industry faces heightened scrutiny. Geopolitical unrest, particularly in regions rich with oil reserves, often leads to market volatility and supply chain disruptions. The recent conflict between Israel and Iran has added a new layer of complexity to the geopolitical landscape, impacting energy markets and investor sentiment alike.
The global oil and gas industry plays a pivotal role in global energy markets, with the Middle East serving as a significant hub for oil production and distribution. The price of oil often serves as a barometer for geopolitical tensions in the Middle East. The BBC reported that Israel’s counterstrike on Iran on April 19 caused Brent crude oil to briefly top $90 per barrel. Experts warn that the potential closure of the Strait of Hormuz, a major shipping route, could cause a large spike in oil prices.
With geopolitical tensions affecting supply chains and oil prices, investors are assessing the resilience and growth prospects of oil and gas companies. Companies like Exxon Mobil, Shell and Suncor Energy are key players in the industry.
What the A+ Stock Grades Reveal
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that research and real-world investment results indicate 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 energy stocks — Exxon Mobil, Shell and Suncor Energy — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Energy Stocks
Grading Energy Stocks With AAII’s A+ Stock Grades
Exxon Mobil Corp. (XOM) operates internationally in the energy and petrochemical sectors. Its core activities include exploring for and producing crude oil and natural gas, as well as manufacturing and selling petroleum products and petrochemicals. The company is divided into four segments: upstream, energy products, chemical products and specialty products. The upstream segment focuses on exploration and production, while the energy, chemical and specialty products segments handle manufacturing and sales of various products, including fuels, aromatics, olefins, polyolefins and finished lubricants. Exxon Mobil also explores lower-emission business opportunities such as carbon capture and storage, hydrogen and lithium.
Earnings estimate revisions indicate how analysts view a firm’s short-term prospects. Exxon Mobil has an Earnings Estimate Revisions Grade of B, based on a score of 68, which is positive. The grade is based on the statistical significance of its latest 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 2023 of 12.0%, and in the prior quarter reported a negative earnings surprise of 4.3%. Over the last month, the consensus earnings estimate for the first quarter of 2024 has increased from $2.130 to $2.202 per share based on 10 upward and two downward revisions. Over the last month, the consensus earnings estimate for full-year 2024 has increased from $8.944 to $9.779 per share, based on 13 upward and four downward revisions.
The components of the Growth Composite Score consider a company’s success in growing sales on a year-over-year and long-term annualized basis and its ability to consistently generate positive cash from its core operations. Exxon Mobil has a Growth Grade of C, with a score of 55, which is average. The company has a five-year sales growth rate of 3.7% and sales have increased year over year for two of the past five years. Cash from operations has been positive in the past five years.
Exxon Mobil has a Momentum Grade of B, based on its Momentum Score of 69, which is strong. This score is derived from above-sector-median relative price strengths of 16.6% in the most recent quarter and 12.3% in the third-most-recent quarter, offset by below-sector-median relative price strengths of –21.2% in the second-most-recent quarter and –19.1% in the fourth-most-recent quarter. The ranks are 85, 25, 84 and 25, sequentially from the most recent quarter. The weighted four-quarter relative price strength is 1.0%, which translates to a rank of 69. 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 weight of 20%.
The company has a Value Grade of B, based on its Value Score of 63, which is considered good value. Higher scores indicate a more attractive stock for value investors and, thus, a better grade. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales (P/S) ratio, price-earnings (P/E) ratio, price-to-book-value (P/B) ratio, price-to-free-cash-flow (P/FCF) ratio, shareholder yield and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA).
Exxon Mobil ranks strongly in terms of its enterprise-value-to-EBITDA ratio of 5.9, in the 22nd percentile. Additionally, its shareholder yield is 6.1%, with a rank of 15, significantly surpassing the sector median of 0.0%. A higher shareholder yield is often attractive to investors, as it indicates a company’s commitment to returning value to its shareholders through dividends or share buybacks, reinforcing the stock’s appeal in a value-focused portfolio.
Shell PLC (SHEL) is an energy and petrochemical company specializing in oil and natural gas exploration, production, refining and marketing, as well as chemical manufacturing. It has five operating segments. The integrated gas segment focuses on liquefied natural gas and gas-to-liquids products. The upstream segment handles exploration and extraction of crude oil, natural gas and natural gas liquids. The marketing segment encompasses mobility, lubricants and decarbonization. The chemicals and products segment deals with chemical plants and refineries, and the renewables and energy solutions segment is responsible for power generation and trading. The company aims to advance sustainable energy solutions alongside its traditional oil and gas operations.
The company has a Value Grade of A, based on its Value Score of 90, which is deep value. Shell’s Value Score is based on several traditional valuation metrics. The company has a rank of 27 for the price-to-sales ratio and 12 for the enterprise-value-to-EBITDA ratio. The company has a price-to-sales ratio of 0.75 and an enterprise-value-to-EBITDA ratio of 4.2. The price-to-book ratio is 1.28, which translates to a rank of 40. Additionally, Shell has a shareholder yield of 10.7%, with a rank of 7.
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.
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.
Shell has a Quality Grade of A, with a score of 91, which is very strong. Shell ranks strongly in terms of its buyback yield and return on assets. The company has a buyback yield of 7.1% and a return on assets of 4.7%, ranking in the 92nd and 76th percentiles, respectively. The sector median for buyback yield is –0.6%, and the sector median for return on assets is 4.4%. Buyback yield represents the rate at which a company repurchases its own shares, indicating confidence in its valuation and a commitment to returning value to shareholders. Return on assets indicates how efficiently a company uses its assets to generate profit. One quality metric where Shell scores weakly is its gross income to assets, ranking in the 45th percentile.
Shell has an Earnings Estimate Revisions Grade of D, based on a score of 36, which is negative. Shell reported a positive earnings surprise for fourth-quarter 2023 of 26.8%, and in the prior quarter reported a positive earnings surprise of 1.8%. Over the last month, the consensus earnings estimate for the first quarter of 2024 has decreased from $1.938 to $1.862 per share based on two upward and two downward revisions. Over the last month, the consensus earnings estimate for full-year 2024 has decreased from $8.012 to $7.938 per share, reflecting two upward and two downward revisions.
Suncor Energy Inc. (SU) operates in the oil and energy sector, focusing on oil sands, refining and marketing of petroleum products. It has several geographic segments, including oil sands, exploration and production and refining and marketing. The oil sands segment primarily produces synthetic crude oil and raw bitumen, while the exploration and production segment focuses on offshore and onshore exploration. The refining and marketing segment refines crude oil and markets petroleum and petrochemical products.
Suncor Energy has a Quality Grade of A, with a score of 91, which is very strong. The company’s buyback yield is 3.9%, significantly higher than the sector median of –0.6%, indicating a commitment to share repurchases. This is a sign of management’s confidence in the company’s valuation. Its return on assets is 9.7%, substantially higher than the sector median of 4.4%, suggesting that Suncor Energy effectively uses its assets to generate profit. However, one quality metric where Suncor Energy falls short is its accruals-to-assets ratio of –4.6%, which ranks in the 46th percentile.
Suncor Energy has a Momentum Grade of B, based on its Momentum Score of 80, which is strong. The company has above-sector-median relative price strengths of 18.0% in the most recent quarter and 19.6% in the third-most-recent quarter. The scores are 86, 29, 90 and 42, sequentially from the most recent quarter. The weighted four-quarter relative price strength is 5.6%, which translates to a rank of 80.
Suncor Energy has an Earnings Estimate Revisions Grade of C, with a score of 56, which is neutral. The company reported a positive earnings surprise for fourth-quarter 2023 of 17.5%, and in the prior quarter reported a positive earnings surprise of 11.7%. Over the last month, the consensus earnings estimate for the first quarter of 2024 has increased from $1.100 to $1.274 per share based on five upward revisions and one downward revision. Over the last month, the consensus earnings estimate for full-year 2024 has increased from $4.951 to $5.264 per share, based on seven upward revisions and one downward revision.
Suncor Energy has a Value Grade of A, with a score of 88, which is deep value. It ranks favorably in terms of its price-earnings ratio, enterprise-value-to-EBITDA ratio, shareholder yield and price-to-free-cash-flow ratio. The stock has a Growth Grade of C, based on score of 55, which is average. Suncor Energy has a five-year sales growth rate of 5.0% and has generated positive cash from operations in the past five fiscal years.
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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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