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With Oil Prices Correcting, Will Oil Companies Still Outperform?
Stock Analysis & Ideas

With Oil Prices Correcting, Will Oil Companies Still Outperform?

Oil prices fell yesterday after two important news flashes hit the market. First, the United Arab Emirates (UAE) vowed to further support increased production of oil. Meanwhile, the Ukrainian President said he was open to compromise on the Russian invasion of the nation.

Following the news, oil prices dropped by as much as 15% with Crude Oil trading around $109. In early February, oil started its upward trajectory in anticipation of the likely war and kept inching up daily as the war progressed.

Oil hit an all-time high surpassing $132, after the U.S. announced that it will stop oil imports from Russia. However, Europe’s decision to continue with its oil imports has provided a breather to the world.  

Inflationary pressures arising from high commodity prices are posing a nightmare for nations, which are still recovering from the brunt of the pandemic.

Russia is one of the major exporters of oil and gas resources to the world. After the U.S. and other countries imposed sanctions, its exports have dropped severely and its Urals grades are being offered at a discount of almost 30%.

Keeping these developments in mind, let us take a look at three Oil companies that have a Smart Score of “Perfect 10” and how the movement in oil prices will benefit them.

Chevron Corp. (CVX)

American oil exploratory company Chevron operates in the upstream and downstream segments. After impressing at its Investor Day held on March 1, and following the uptick in oil prices, its shares have gained 22.2% over the past month.

Analysts from renowned Wall Street firms were impressed with Chevron’s plans to ramp up its share buyback program, along with plans to increase oil and gas production, and expected growth in operating cash flows. The analysts have increased their estimates and price targets on the stock.

The company’s average crude oil price per barrel in Q4 was $63 for U.S. Upstream and $74 for International Upstream. While consolidated FY21 average sales price stood at $66.14 (77% Y/Y growth).

Chevron is “relatively less exposed than others in our industry” to the ongoing war, but it is poised to benefit from inflated oil prices.

The Wall Street community is cautiously optimistic about the stock with a Moderate Buy consensus rating based on 16 Buys and 7 Holds. The average Chevron price target of $154.43 implies 7.1% downside potential to current levels.

TotalEnergies SE (TTE)

French oil and gas explorer, TotalEnergies operates through four segments: Exploration & Production; Integrated Gas, Renewables & Power; and Downstream. Its shares have lost 14.2% over the past month.

Expressing discontent with Russia’s invasion, the company said that it will, “Support the scope and strength of the sanctions put in place by Europe and will implement them regardless of the consequences (currently being assessed) on its activities in Russia.”

In its Q4, the company benefitted from record-high prices for oil and gas, as well as favorable pricing in electricity. The average Brent Oil price per barrel was $79.8 in Q4 (80% Y/Y growth) and $70.9 (69% Y/Y growth) for FY21.

In 2022, TTE expects favorable pricing trends to continue. Based on strong cash flow generation, the company intends to increase interim dividends by 5%, and repurchase shares of up to $2 billion in the first-half of 2022.

Analysts on the Street are bullish about TTE stock with four unanimous Buy ratings. The Strong Buy rating consensus comes with an average TotalEnergies price target of $74, which implies 46% upside potential to current levels, at the time of writing.

Occidental Petroleum (OXY)

U.S.-based oil and gas producer Occidental Petroleum operates through the following segments: Oil and Gas, Chemical, and Midstream and Marketing. 

After outperforming expectations in its fourth-quarter results, its shares have gained 41.3% over the past month. The company even raised its quarterly common dividend and announced a new share buyback program.

For OXY, the average realized crude oil price per barrel was $75.39 in Q4 and $66.14 (77% Y/Y growth) for FY21.

In an interesting twist, two noteworthy shareholders have given contradictory signals on their take of OXY shares. While hedge fund investor Carl Icahn has completely sold off his stake at OXY’s current highs, billionaire investor Warren Buffet has increased his stake to 9.8% in the company in the last week.

Turning to Wall Street analysts’ views, who are cautiously optimistic about OXY, which has a Moderate Buy consensus rating based on 10 Buys, five Holds, and one Sell. The average Occidental Petroleum price target of $46.53 implies 19.1% downside potential to current levels.

Concluding Thoughts

Although oil prices are correcting from their record highs, they remain well above all three companies’ average oil prices for the fourth quarter and fiscal 2021. This implies that they are well-positioned to outperform expectations, at least in the first half of 2022.

Looking at their relative valuations and 12-month price targets, only TotalEnergies stock has upside potential to current levels, which means the stock has a lot of room for growth in the coming months.

Moreover, both Chevron and OXY currently trade at a Price to Earnings (P/E) multiple of 20.43 times and 26.50 times, respectively, which is way above the industry P/E of 15.50 times. Meanwhile, the TTE stock currently trades at a P/E multiple of 8.64 times, which is well below the industry P/E implying a good entry point.

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