Stock Analysis & Ideas

2 Oil Stocks to Buy in a Wild Energy Market

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Although the Federal Reserve’s pivot to an aggressively hawkish monetary policy bodes poorly for big oil stocks, the harsh reality is that both economic dynamics and geopolitical flashpoints make the hydrocarbon sector incredibly relevant.

Viewing the framework of big oil stocks from hundreds of miles above, the surrounding circumstances don’t necessarily provide encouragement for investors. With monetary policy likely to tighten in the months and perhaps years ahead, commodity prices may fall as the dollar gains strength. However, overriding economic and geopolitical factors may represent the ultimate arbiters. I am bullish on Chevron (NYSE:CVX) and Shell (NYSE:SHEL) – the main focus of this article.

Few market segments incurred the wild gyrations of big oil stocks since 2020. Back in April 2020, oil prices briefly, but in an unprecedented fashion, dropped below zero. Pictures of oil tankers stuck in the open sea flashed across global headlines. However, a remarkable resurgence of consumer sentiment helped drive a recovery in the hydrocarbon industry. As well, accommodative monetary policies aided commodity valuations.

Recently, though, the Federal Reserve – recognizing the need to correct prior monetary excess – pivoted aggressively to a hawkish framework. Most notably, the central bank raised the benchmark interest rate by 0.75%, implying that further hikes may be necessary until inflation comes under control. Higher rates correlate with rising borrowing costs, which then create a deflationary environment as the money supply tightens.

Though incredibly bearish for oil stocks, two factors may help overcome the negative implications associated with deflationary forces. First, on an economic level, the average price of a new electric vehicle is nearly $63,000. As much as consumers want to make the pivot to EVs, they simply don’t have the funds necessary.

Second, against a geopolitical framework, Russia’s invasion of Ukraine has not gone according to the Kremlin’s plan. The subsequent partial mobilization of Russian troop reserves may indicate growing restlessness to bring meaningful battlefield victories to Russia. One thing is likely for certain: the crisis will not end anytime soon.

Although cynical, the escalating conflict between western nations and Moscow places a stark spotlight on the hydrocarbon sector. Below are two big oil stocks that may benefit.

Chevron

For investors tiptoeing into the hydrocarbon industry, few big oil stocks present as balanced and compelling of a framework as Chevron. Primarily, what makes the company stand out from independent oil and natural gas plays is its vertically integrated structure. Involved in the upstream (exploration and production), midstream (storage and transportation), and downstream (refining and marketing) components of the energy value chain, Chevron covers the widest canvas possible.

It’s also putting its massive footprint to good use. In its most recent financial disclosure for the second quarter of 2022, Chevron posted revenue of $65.37 billion. This tally represented a gargantuan increase of 81% against the year-ago period. Further, the company posted a net income of $11.6 billion, representing nearly a four-fold increase from Q2 2021.

Judging from Chevron’s retained earnings line item, the business recovered very well from the COVID-19 disruption. At the end of 2020, the company saw retained earnings dip to $160.4 billion, down conspicuously from the $175 billion posted in 2019. However, on a trailing-12-month (TTM) basis, Chevron is now looking at $177.9 billion.

Is CVX Stock a Buy or Sell?

Turning to Wall Street, CVX stock has a Moderate Buy consensus rating based on 10 Buys, five Holds, and zero Sells assigned in the past three months. The average CVX price target is $178.73, implying 22.2% upside potential.

Shell

Moving across the Atlantic, those seeking an international angle for big oil stocks should consider British multinational oil and gas firm Shell. As with Chevron above, Shell features a vertically integrated business, thus being involved in every aspect of the hydrocarbon value chain. A particular advantage that this structure has is better revenue predictability.

For instance, companies tied exclusively to the upstream side of the industry could suffer catastrophic losses if lower-than-expected exploration and production materialize. On the other hand, midstream and downstream businesses may enjoy better consistency as they serve demand where the rubber (literally) meets the road.

Moreover, Shell announced a few months back that it will begin building Europe’s largest green hydrogen facility. This focus presents a favorable narrative for prospective buyers as it indicates that Shell is looking to diversify meaningfully beyond just hydrocarbon products and services.

Like Chevron, Shell put the post-pandemic paradigm to good use. In Q2 2022, Shell generated a staggering $100 billion in revenue, up over 65% against the year-ago quarter. On the bottom line, Shell posted a net income of $18 billion, a more than five-fold increase from Q2 2021.

What is the Target Price for SHEL Stock?

Turning to Wall Street, SHEL stock has a Moderate Buy consensus rating based on two Buys, one Hold, and zero Sells assigned in the past three months. The average SHEL price target is $68.33, implying 41.6% upside potential.

Chevron vs. Shell: Which Oil Stock Should You Buy?

As vertically integrated big oil stocks, investors seeking broad exposure to the hydrocarbon industry can’t really go wrong with either Chevron or Shell. Given the size of their businesses, they should provide relative stability, allowing stakeholders to sleep easier during these unprecedented times. However, Shell might get some extra kudos for its substantive pivot to green hydrogen.

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