Say, ‘energy,’ and what’s the first thing that comes to mind? Perhaps the sun or your electric and gas bills come to mind, or maybe the gas station down at the corner – petrol, if you’re British. For those with progressive minds, wind or solar power might be their first thought. Whatever your bent, you can’t avoid energy; it’s been the cornerstone of human existence since the invention of fire.
Today, energy isn’t just the driving force of modern life; it’s also a complex business. The world’s major energy companies – names like ExxonMobil, Chevron, Shell, or Saudi Aramco – base their business on hydrocarbon extraction, pumping oil and natural gas out of the ground. But that sector is facing a heavy combination of social and political pressures, so the energy firms have been diversifying, moving into industrial and petrochemicals, alternative and green energy, carbon capture technologies – the segments that are attracting support from the forces pressuring traditional energy sources.
Despite our dependence on energy, the sector has been buffeted by headwinds in 2023, and the S&P 500 energy sector index is down 4.5% for this year. Factors stressing the industry include a volatile macroeconomic situation, geopolitical tensions, trade route disruptions, and commodity price inflation. At the same time, the big energy stocks continue to provide solid opportunities for investors.
A recent report from 5-star UBS analyst Josh Silverstein underscores this point. He comes out with solid recommendations for two energy stocks in 2024, basing his outlook on a combination of factors. These include the companies’ footprints in alt-energy or strength in mergers. For investors, Silverstein sees an opportunity brewing. Let’s take a closer look.
ExxonMobil (XOM)
We’ll start with ExxonMobil, one of the world’s largest oil companies. ExxonMobil has a market cap totaling $406.1 billion, putting it in second place among its peers. The firm raked in a profit of $56 billion in 2022 – setting a company record – and listed total assets worth $372.25 billion at the end of 3Q 2023. The company’s main focus is on the discovery, extraction, transport, and delivery of crude oil and natural gas resources, and the company also has extensive operations in industrial chemicals, especially petrochemicals. ExxonMobil is working on lighter-weight, environmentally friendlier, plastics technologies, for use in everything from cars and airliners to handheld digital devices.
A look at ExxonMobil’s recent activities gives a good picture of the company’s business and ability to expand. This past November, ExxonMobil announced the closure of its Denbury acquisition. Denbury, a hydrocarbon firm specializing in carbon-based unconventional petroleum extraction from previously exploited oil fields, operates mainly in the Gulf Coast and Rocky Mountain regions. ExxonMobil acquired the company in an all-stock transaction valued at $4.9 billion.
Also in the oil sector, ExxonMobil in November announced the commencement of production in its third offshore project in the South American nation of Guyana. The project is focused on the Starbroek Block and will bring ExxonMobil’s Guyanese oil output to approximately 620K barrels per day.
Turning our attention toward alternative energy, ExxonMobil announced on November 13 that it has begun drilling operations at its first lithium well in Arkansas, applying its drilling expertise to the extensive lithium deposits in that state. The project has the potential to dramatically expand North American lithium output, and the company expects to begin commercial production in 2027. Lithium, of course, is essential in the high-end rechargeable batteries used in digital devices and electric vehicles.
A look at ExxonMobil’s most recent quarterly report, from 3Q 2023, showed a combination of revenues and earnings below expectations – but rising cash flows. At the top line, XOM reported revenues of $90.76 billion, down 19% year-over-year and $1.81 billion under the estimates. The oil giant’s bottom line came to $2.27 per share by non-GAAP measures, down 49% y/y and 9 cents per share lower than the forecast. The company’s cash flow, however, was seen as strong. Cash flow from operations was reported at $16 billion, up $6.6 billion from the previous quarter.
Solid cash flows allowed ExxonMobil to bump up its quarterly dividend, which was raised from 91 cents per common share to 95 cents. The new dividend, which was paid out on December 11, annualizes to $3.80 and yields 3.74%.
Writing for UBS on ExxonMobil, top analyst Silverstein lays out a clear case for optimism on this stock. He cites the company’s sound investments and strong balance sheet, writing, “Driving our positive outlook is XOM’s visible upstream growth above peer levels, Downstream/Chemicals capacity additions improving underlying EPS power, Low Carbon investments providing l-t growth potential, and balance sheet strength enabling higher capital returns at current oil prices or supporting them in a < $50 /bbl environment.”
In Silverstein’s view, these remarks provide a compelling reason for a Buy rating, and the analyst’s $133 price target suggests a potential ~33% increase in share value within the next year. (To watch Silverstein’s track record, click here)
Overall, the Street is willing to go in on XOM – the stock has a Moderate Buy consensus rating, based on 20 recent analyst reviews that include 14 Buys to 6 Holds. The shares are priced at $100.19 and the $129 average price target suggests a one-year upside potential of ~29%. (See ExxonMobil stock forecast)
Chevron Corporation (CVX)
Next up is Chevron, whose $286.1 billion market cap makes it the world’s third-largest oil company. The company generated $235.72 billion in revenues during 2022, and earned a record-level profit of $36 billion for that year. At the end of 3Q23, the company listed $41.73 billion in current assets on the books. Chevron supports its growth and results with its oil and natural gas activities – the company is active in exploration and production, hydrocarbon transportation, maritime tanker shipping for both crude oil and liquefied natural gas, and petroleum refining.
In addition to its crude oil and natural gas operations, Chevron is also active in the production of fuels, lubricants, and other petrochemicals, as well as the additives that are commonly used with them. The company has a retail segment that markets the firm’s refined products and fuel and lubricant additives; this segment includes Chevron’s branded chain of gas stations. In the industrial fuels market, Chevron works in partnership with Phillips 66, a peer company, as a 50/50 partner.
In October of 2023, Chevron announced it had entered an agreement to acquire the independent E&P firm Hess Corporation, through an all-stock transaction estimated at $53 billion plus approximately $7 billion in debt assumption. The acquisition will bring additional diversity to Chevron’s production portfolio, including a share in the Starbroek play – mentioned above, in conjunction with ExxonMobil – on the Guyana coast, as well as assets in the Bakken and Permian formations of Montana and Texas.
Overseas, Chevron holds a 50% interest in Tengizchevroil, TCO, the firm operating in the Tengiz oil field, on the northeastern coast of the Caspian Sea of Kazakhstan. This has been described as the world’s largest single-trap producing reservoir and holds an estimated 25.5 billion barrels of recoverable oil. Operations in the Tengiz Field are expanding, and daily production capacity is in the neighborhood of 600,000 barrels of crude oil and 22 million cubic meters of natural gas.
Turning to the financial side, we find that Chevron reported $54.08 billion in total revenues for 3Q23, the last financials released. This figure was down y/y, by almost 19%, but beat the forecast by $1.08 billion. Chevron’s bottom-line earnings came to $3.05 per diluted share by non-GAAP measures, missing the estimates by 64 cents per share. At the same time, the company registered a 4% increase in worldwide net oil-equivalent production, mainly due to M&A activity.
Chevron declared its dividend with the Q3 results, at $1.51 per common share. This payment annualizes to $6.04 per share and yields a shade under 4%. The dividend was sent out on December 11, as part of Chevron’s $6.2 billion in capital returns to investors for the quarter.
When we check in again with UBS analyst Josh Silverstein, we find him citing the Hess acquisition and the TCO operations among his reasons to go all-in on Chevron. He writes of the company, “We reiterate our view that CVX’s >10 % 2025 FCF Yield should narrow towards historical 708% levels as they integrate the HES and deliver on the new TCO timeline and budget. The latter is the biggest risk embedded in CVX. We see both as key 2H24-1H25 catalysts. We look for CVX to provide a Corporate Update in 2H24 post HES close, outlining more long-term growth and divestiture program details.”
Looking ahead, Silverstein rates the stock as a Buy, with a $185 price target that points toward a 23% increase in store for the stock in the next 12 months.
Overall, CVX shares get a Moderate Buy from the consensus of the Wall Street analysts, based on 18 reviews that break down 12 to 6 in favor of the Buys over the Holds. The shares are trading for $149.77 and their average target price, now at $179.59, implies the stock will gain ~20% by the end of 2024. (See Chevron stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
