Despite the weakness in oil and gas prices, many energy stocks were bid higher following the release of some stellar quarterly earnings results. High energy prices translated to blowout earnings for many energy producers. Though weakness in the commodity space could drag into the end of the year, the recent bear market in energy may have already anticipated such a negative trend continuation.
Following such a strong quarter for the energy giants, many top energy stocks now have earnings multiples that are even more compressed. Indeed, the market doesn’t view the recent energy windfall as sustainable. Still, energy prices are historically high, paving the way for more impressive cash flows over the medium-to-long term.
With this in mind, we’ve used TipRanks’ Comparison Tool to check on three high-quality energy stocks – XOM, PSX, and SHEL – that Wall Street analysts love, with a “Strong Buy” consensus rating. Let’s take a closer look.
Exxon Mobil (XOM)
Exxon Mobil is a former Warren Buffett favorite that’s been doing incredibly well on a year-to-date basis, up 45%. Since peaking out in early June, shares of XOM have been a rather bumpy ride, plunging just north of 20% before moving slightly higher to $88 and change per share — down just shy of 15% from their peak.
The oil and gas giant crushed analyst estimates for its second quarter, with per-share earnings of $4.14, comfortably above the consensus of $3.83. Exxon’s revenue surged nearly 28% quarter-over-quarter (or 71% year-over-year) to $115.7 billion.
Indeed, that’s an unprecedented top-line growth bound to slow as oil finds a new (likely lower) range to settle into. Though oil may struggle to stay above $100 per barrel, supply constraints due to Russia’s invasion of Ukraine could continue to keep oil prices well above pre-pandemic levels.
It wasn’t just the favorable energy price environment to thank for Exxon’s incredible blowout result. The company’s cost-reduction program is starting to pay dividends, and the recent production increase proved well-timed.
With stellar fundamentals and swelling free cash flows, Exxon has the financial flexibility to continue investing in its business while trimming away debt and rewarding shareholders with super-sized dividend hikes.
At writing, shares of XOM trade at just 9.7x trailing earnings, 1x sales, and 6.2x operating cash flow, all of which are in line with industry averages.
After clocking in sensational results, many Wall Street analysts view Exxon Mobil as a terrific value play. I think they’re right. Currently, there are 11 Buys and three Sells on the name. The average price target implies around 23.3% upside potential over the year ahead. Meanwhile, the Street-high price target of $125.00 implies 40.5% upside potential from the current price of $88.95, not including the bountiful 3.96% dividend yield.
Philips 66 (PSX)
Philips 66 stock is potentially a great way to play energy refinement. Year-to-date, shares of the downstream energy company are up just north of 15% — relatively muted versus the likes of producers like Exxon.
For its latest (second) quarter, the firm felt the strong industry winds at its back, helping fuel a solid earnings beat ($6.77 versus the $5.95 consensus estimate). Revenue came in at $49.3 billion, up around 33% quarter-over-quarter.
Indeed, the energy giants are clocking in growth numbers that speculative tech firms posted in the early innings of 2021. Like the tech firms that were bid up last year, the euphoric times are unlikely to last. Fortunately for the energy giants, investors don’t expect such good times to last. Still, their free cash flow windfalls may be underestimated by investors inclined to take profits here following the recent slip in oil prices.
Philips 66 is using its cash windfall to reduce debt and return capital to shareholders. Earlier this year, the firm hiked its dividend payout by 5%. Beefed-up share buybacks may also be in the cards, as the firm finds itself with enough to spoil shareholders. The company seeks to return around 40% of its cash flows to investors. Pending an oil collapse, it seems like PSX shareholders are in for a treat. The dividend currently yields an impressive 4.63%.
The stock trades at a mere 0.3x sales and 7.1x trailing earnings. These numbers, especially the former, seem indicative of some sort of value trap. Philips 66 appears to be actual value, though, with a wide moat protecting its economic profits.
Wall Street seems to agree, with nine Buys and just one Hold, for a $116 price target and 38.4% implied upside potential from PSX’s current price of $83.80. RBC (RY) Capital’s T.J. Schultz is the latest analyst to maintain his Buy rating, with a handsome $112.00 price target.
Shell (SHEL)
Shell is a British energy kingpin worth going overseas for the extra value. Like many energy giants, Shell saw its price-to-earnings (P/E) multiple contract in a big way following the release of its Q2 numbers. The earnings results were good but in line with estimates.
With oil prices on the descent, Q2 earnings results had a pretty muted reaction, in my opinion. Shell stock is down around 15% from its all-time high of over $60 per share. Though Shell is slightly less sensitive to oil price fluctuations than its peers, given its long-term production ramp-down, I view Shell as a deep value that’s really hard to ignore.
The stock trades at 5.5 times trailing earnings, 0.6 times sales, and 3.7 times operating cash flow. That’s bottom-of-the-barrel pricing, as far as I’m concerned. With management boosting share buybacks for Q3 after $7.4 billion in dividends and buybacks rewarded to investors in Q2, I think it’s hard to pass up the firm while it continues to enjoy its massive free-cash-flow windfall.
Shell’s windfall won’t last forever; it’s not expected to, and Shell has a plan to push forward after energy prices come back down to Earth. With an intriguing power-as-a-service solution to look forward to, I view Shell as an excellent fossil fuel firm open to the reality of a sustainable transition.
Wall Street sees real value to be had in Shell stock, while it is gushing with free cash flow, with three Buys, one Hold, and a consensus price target of $66.75 implying 28.4% upside potential.
Conclusion
Energy giants have been dealt a terrific hand in recent quarters. Though the windfall won’t last forever, many may be underestimating the value to be had at this juncture. I don’t think the low multiples are lying to investors. Of the three stocks, analysts seem to be most bullish on PSX stock.
