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Will Saudi Aramco and Other Oil Majors Continue to Shine After Stellar Q2 Results?

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Saudi Aramco and several other energy companies have delivered strong second-quarter results fueled by high energy prices and tight supplies. However, energy prices have cooled down over recent days due to fears of an economic downturn impacting demand. Currently, the short-term outlook remains uncertain amid geopolitical concerns and macroeconomic challenges.

Oil giant Saudi Aramco (The Saudi Arabian Oil Company) recently reported impressive second-quarter results, thanks to soaring energy prices. Aramco’s Q2 net income surged 90% to $48.4 billion, fueled by higher crude oil prices, increased volumes, and solid refining margins. Free cash flow grew 53% to $34.6 billion and helped Aramco declare a dividend of $18.8 billion for the second quarter. Like Aramco, oil majors like ConocoPhillips (COP), Exxon Mobil (XOM), and Chevron (CVX) also posted strong Q2 results. Despite concerns about the decline in energy prices over recent days amid fears of an economic slowdown, Wall Street analysts remain bullish on the prospects of oil companies.  

Cash-Rich Saudi Arabia Invests in U.S. Stocks

Rich with cash from higher energy prices, Saudi Arabia is ramping up its investments in U.S. stocks. As per an SEC filing, The Public Investment Fund, Saudi Arabia’s sovereign wealth fund, invested more than $7 billion in shares of several U.S. companies in the second quarter. The list includes Amazon (AMZN), Microsoft (MSFT), Advanced Micro Devices (AMD), Alphabet (GOOGL), Starbucks (SBUX), Walmart (WMT), Home Depot (HD), JPMorgan Chase & Co. (JPM), and NextEra Energy (NEE).

The Public Investment Fund, which as per Reuters has assets under management of nearly $620 billion, is diversifying its investments to lower its dependence on oil.

What Lies Ahead for Oil Companies?

Oil prices skyrocketed this year due to strong demand following the reopening of the economy. Russia’s invasion of Ukraine led to major supply constraints and further price gains. However, oil prices have cooled off over recent days as recessionary fears are weighing on the demand outlook.

Also, the recently released weaker-than-expected economic data by China, the world’s largest crude oil importer, dragged down prices.  Further, the growing possibility of a revival of the Iran nuclear deal has also weighed on oil prices, as the deal would enhance supply to global markets.

That said, the uncertainty with regard to the Russia-Ukraine conflict persists, which might continue to impact supplies and keep prices high, if not as elevated as they were earlier in the year.  

Let us look at what Wall Street analysts say about three of the leading energy companies.

ConocoPhillips (NYSE: COP)

ConocoPhillips is one of the leading exploration and production companies, with operations in 13 countries. Earlier this month, the company reported market-beating earnings, driven by higher energy prices. Adjusted EPS surged 208% to $3.91. ConocoPhillips boosted its 2022 planned capital return by $5 billion to $15 billion.

Mizuho Securities analyst Vincent Lovaglio noted that ConocoPhillips’s $15 billion capital return plan implies a cash return yield of nearly 14%, which he believes is “highly competitive” with the rest of the exploration and production companies under his coverage.

Lovaglio stated that the company is gaining from “full exposure to the commodity” (with no hedges) and from its exposure to international natural gas prices. Vincent expects the favorable impact of global gas exposure to remain through 2023, noting that “Norwegian gas realizations were again $30/mcf+ this quarter while equity affiliate LNG realizations were $10/mcf+.”  

The analyst reiterated a Buy rating on ConocoPhillips stock with a price target of $148, stating that “And COP is leveraging its relative capital intensity advantage to add longer-term exposure in global gas while maintaining competitive free cash and cash return yield with peers.”

Is COP Stock a Good Buy Now?

Overall, ConocoPhillips scores a Strong Buy consensus rating backed by 10 Buys and one Hold. The average COP price target of $129.64 suggests 27.90% upside potential from current levels.

Exxon Mobil (NYSE: XOM)

Lead integrated oil and gas company Exxon Mobil’s adjusted EPS rose 276% to $4.14 in the second quarter. The company’s impressive results were driven by higher price realizations, strong refining margins, and efforts to keep costs in check. Exxon aims to generate over $9 billion in cost savings by 2023.

Exxon’s Q2 shareholder distributions came in at $7.6 billion, including dividends and share repurchases. The company intends to make share repurchases of up to $30 billion through 2023.

Following the Q2 print, Bank of America Securities analyst Doug Leggate raised his price target for Exxon stock to $123 from $120, and maintained a Buy rating. The analyst stated the company’s solid Q2 results reflect the benefits from its portfolio investments over the past six years and a favorable portfolio mix with a “downstream exposure at 1.8x oil production.”

Furthermore, Leggate believes that Q2 results also gained from Exxon’s efforts to bring down costs by over $6 billion over the past three years. The analyst expects Exxon’s free cash flow growth to continue to outpace its rivals, with the company continuing to bring down its debt.

Is XOM a Buy or Sell?

All in all, Exxon scores a Strong Buy consensus rating that breaks down into 10 Buys and three Holds. The average Exxon Mobil stock price prediction of $110.13 implies 19.45% upside potential from current levels.

Chevron (NYSE:CVX)

Like most of its peers, Chevron also topped analysts’ earnings expectations for the second quarter. The company’s Q2 adjusted EPS surged a whopping 240% to $5.82, driven by higher commodity prices and solid margins.

Chevron raised the top end of its 2022 share repurchase guidance range to $15 billion from $10 billion. Also, strong cash flows enabled the company to bring down its debt for the fifth consecutive quarter. The company’s net debt ratio for Q2 came in at 8.3%, which is way below the company’s mid-cycle guidance of 20% to 25%.     

Chevron continues to invest in traditional as well as renewable sources of energy. It recently acquired Renewable Energy Group to expand its suite of cost-effective, lower carbon solutions. The company has also partnered with Bunge North America, Inc. to form a renewable fuel joint venture. Meanwhile, Chevron is also enhancing its crude oil supply by investing in the Ballymore project in the deepwater U.S. Gulf of Mexico.   

Recently, Societe Generale analyst Irene Himona upgraded Chevron to a Buy from Hold and increased her price target to $190 from $175. Himona believes that Chevron’s earnings beat despite a 7.4% year-over-year decline in production, along with the upward revision to the top-end of its 2022 buyback range, were impressive. The analyst significantly raised her EPS estimates to reflect a strong earnings beat in the first half of the year, higher refining margin assumptions, and a lower debt forecast.

Is CVX a Good Buy Now?

Meanwhile, analysts are cautiously optimistic about Chevron, with a Moderate Buy consensus rating based on 10 Buys, five Holds, and one Sell. The average Chevron target price of $178.94 implies 13.47% upside potential from current levels.

Conclusion

Saudi Aramco and other oil majors posted impressive Q2 results due to higher energy prices amid robust demand and tight supplies. However, the near-term outlook seems uncertain. The possibility of reduced demand due to an impending recession has brought down energy prices over recent days. However, certain analysts feel that supply constraints amid geopolitical concerns might keep the prices high.

Overall, Wall Street analysts continue to be bullish on the long-term prospects of several oil and gas companies as they continue to invest in capacity expansion.

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