After a spell of strong and increasing demand, momentum is slowing in the oil and gas sector. Demand growth is expected to decelerate to 1.2 mb/d in 2024, compared with 2.3 mb/d last year. On the other hand, the Russia-Ukraine war continues to pressure the oil supply, creating an opportunity for crude prices to rise once again.
This volatile market backdrop has led energy companies to see skyrocketing gains followed by moderation over the past couple of years, necessitating a closer look at energy stocks for the best investment opportunities.
Energy giants Exxon Mobil Corporation (NYSE:XOM) and BP p.l.c. (NYSE:BP) are among the top choices, but which is best?
Exxon Is Shareholder Friendly
Exxon Mobil, an integrated resource giant, has spread its operations across integrated fuels, lubricants, and chemicals. While the company started as a regional marketer of kerosene and, it has evolved over a 140-year period to become one of the biggest, if not the biggest, names in the U.S. conventional energy landscape.
Long a favorite of investors for producing stable shareholder returns, Exxon Mobil did not stop dividend payments even during the height of the economic struggles of 2020-21.
In 2023, Exxon Mobil paid $14.9 billion in dividends. The company has recently paid a dividend of $0.95 per share. This amounts to $3.80 annually, yielding 3.34% on current prices. It also has an ideal payout ratio of 38.66%, indicating the relative stability of its dividends.
Earnings Lower But Still Strong
Last year was a moderation period for the energy markets after crude prices skyrocketed in 2022. Natural gas prices also significantly moderated last year. The energy market’s highs, lows, and general volatility impacted the energy giants’ operations.
The company also recognized an additional tax from the European Union, levied to address high energy prices. These regulations resulted in an after-tax charge of approximately $200 million in 2023.
In fiscal 2023, Exxon Mobil’s total revenues and other income decreased by 17% year-over-year to $344.58 billion. Earnings fell year-over-year in each of the last three quarters.
As a result, annual earnings declined by 35% from the prior year to $36.01 billion. Non-GAAP free cash flow came in at $36.10 billion, down 42% year-over-year. Despite these declines, the company remains profitable.
Exxon Has a Wide Moat
Additionally, the company has developed a wide moat over the years, which supports future growth. For example, in the fourth quarter of fiscal 2023, management announced a new MobilTM Lithium business, aiming to become a leading supplier of EVs by 2030.
This marks a critical shift in Exxon Mobil’s operative capacity. Last year, work began on its first North American lithium production phase in southwest Arkansas.
The company has also recognized organizational changes, cutting costs and driving operational efficiencies. This has enabled it to capture $9.7 billion compared to 2019, including $2.3 billion of savings in 2023.
This energy giant does have its share of competitive woes, however. Exxon Mobil’s chief competitor Chevron Corporation (NYSE:CVX), is eyeing a massive acquisition of Hess Corporation (NYSE:HES) to gain from its lucrative oil assets in Guyana.
Exxon has claimed a right of first refusal in this deal over Hess’ Guyana assets under a joint operating agreement that governs the Stabroek oil block.
How Is BP Coping with Loss of Russian Operations?
BP is a London-based energy juggernaut and one of the most internationally acclaimed energy companies. It started operations in 1908 when oil was discovered in Persia.
BP has also diversified into specialty chemicals and lower-carbon ventures and is focused on transforming from an international oil company (IOC) to an integrated energy company (IEC).
Macroeconomic and geopolitical factors have also affected the company’s performance. First, in 2022, BP exited its 19.75% shareholding in Rosneft and its other business in Russia due to the Russia-Ukraine war. This move resulted in a post-tax charge of $24.4 billion in its Q1 2022 results.
It also reduced the company’s reported oil and gas reserves by more than 50% and production by around one-third. This significant impact was felt in the company’s bottom line when it posted a loss attributable to shareholders of $2.49 billion for 2022.
Since then, the company’s operations have stabilized. It posted a huge turnaround in 2023, with profits attributable to shareholders of $15.24 billion. However, 2023 was also the year the company showed top line weakness across its broad segments.
Total revenues and other income grew by 52% year-over-year between 2021 and 2022, while it declined 14% between 2022 and 2023 to reach $213.03 billion.
Refining companies in Europe are facing strict environmental restrictions that are affecting operations. BP also faces this pressure. The company now plans to reduce the crude processing capacity of its Gelsenkirchen oil refinery in Germany by around one-third from 2025, citing weak demand.
From the Russia-Ukraine war to the Middle East conflict, BP and Abu Dhabi National Oil Co.’s (Adnoc) planned acquisition of a 50% stake in Israeli gas producer NewMed Energy was put on hold as regional conflicts persisted. On the other hand, BP expects higher reported and underlying upstream production this year.
Moreover, BP pays a stable dividend to its shareholders. In 2023, the dividend per ordinary share was 28.42 cents. Its Q4 2023 dividend rate of 7.27 cents per share, indicating a 10% increase compared to Q4 2022. The company also reduced its net debt to $20.9 billion, marking the lowest level over the past decade.
The energy giant also has growth opportunities lined up. Recently, BP acquired the freehold of one of the largest truck stops in Europe, Ashford International Truckstop in Kent, with a target of electrifying heavy goods vehicles (HGVs). Going out of the norm, it was reported that BP is optimistic about its prospects in Brazil, which can be deemed as a high-risk exploration project.
Exxon vs BP Stock: Which Is Best?
According to analysts, BP stock is better with 10.7% upside to fair value of $41.94 per share whereas Exxon has just 6.4% upside potential to $124.67.
Both Exxon Mobil and BP have produced moderate returns over the past year yet both exhibit solid growth prospects as they further diversify operations due to their wide moats.
Additionally, both stocks are trading at moderately cheap valuations. Although Exxon Mobil’s forward non-GAAP P/E of 12.82x is a bit stretched by industry standards, it is lower than the five-year average of 15.67x. On the other hand, BP is trading only 7.96 times forward earnings.
However, Wall Street analysts’ price targets for Exxon Mobil and BP indicate modest upsides. With its recent lithium endeavors, Exxon Mobil cannot be counted out, though, so perhaps some exposure to both is the smartest investment allocation.
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