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This Integrated Energy Stock Has the Most Potential

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As oil prices get volatile, it’s imperative to know integrated energy stocks’ outlook. Analysts’ mean price targets for Chevron (CVX), Royal Dutch Shell (RDS.A), ExxonMobil (XOM), BP (BP), Total (TOT), and Suncor Energy (SU) suggest that SU has the highest upside potential of 36%. TOT and RDS.A follow with 32% and 29% upside potential.

This year, most analysts expect integrated energy companies’ earnings to fall due to lower crude oil prices. Despite rising 25% year-to-date, WTI prices are 11% lower YoY. Oil prices impact integrated energy companies’ upstream realization and earnings. Analysts expect BP’s, ExxonMobil’s, and Chevron’s EPS to fall 13%, 24%, and 6% YoY this year.

Whose earnings could rise?

In contrast, analysts expect Suncor’s, Total’s, and Shell’s EPS to rise 24%, 11%, and 7% YoY this year thanks to higher upstream volumes. Suncor and Total expect their upstream production to rise 10% and 9%, respectively. These companies’ other business segments could also support their earnings amid volatility.

Overall

Analysts see high upside potential for Suncor, Total, and Shell, and expect their earnings to rise this year. In the second quarter, they expect Suncor’s and Shell’s EPS to rise 26% and 11% YoY.

Furthermore, these stocks have below-average valuation. Suncor’s, Total’s, and Shell’s forward PE multiples are 12.1x, 8.8x, and 10.5x, and they have decent dividend yields of 4.0%, 5.2%, and 5.9%. Let’s now examine the stocks in detail, beginning with Suncor.

Suncor: The best upside potential

Suncor has the best upside potential among peers, of 36%. Its potential has risen in the past year due its stock price falling 23%. Analysts’ mean price target for Suncor stock has fallen 11% in the past year to $42.70. JPMorgan Chase has lowered its price target for Suncor from 51 Canadian dollars (or $39.10) to 49 Canadian dollars (or $37.50), and GMP has cut it from 48 Canadian dollars (or $36.80) to 43 Canadian dollars (or $39.90).

Analysts expect Suncor’s earnings to rise 24% this year and 26% YoY in the second quarter, the most among peers. Suncor has strong financials and an expanding upstream portfolio.

In the first quarter, Suncor’s adjusted income rose 23% YoY to 1.3 billion Canadian dollars, and its cash flow from operations rose 114% YoY to 1.5 billion Canadian dollars. Suncor’s debt-to-total capital ratio stood at 30% during the quarter, above the peer average of 29%. The company’s net debt-to-adjusted EBITDA ratio of 1.4x was also above the average of 1.3x. Analysts expect Suncor’s earnings and cash flow to rise, which could push both its debt ratios below peer averages—a favorable scenario.

Suncor’s growing upstream portfolio

Suncor expects its hydrocarbon volumes to grow 10% this year. In the first quarter, Suncor’s upstream output rose 11% YoY to 0.76 MMboed (million barrels of oil equivalent per day), despite the Government of Alberta cutting production.

Suncor’s high asset reliability at Syncrude supported the company’s production. Plus, rising volumes at Fort Hills and Hebron drove its volume growth. ExxonMobil’s, Chevron’s, and BP’s volumes were 3.98 MMboed, 3.04 MMboed, and 2.66 MMboed, respectively, in the quarter.

Total: The second-best upside potential

Total has 32% upside potential based on analysts’ mean price target. The potential has increased sharply in the past year due to its stock price falling 12%. Meanwhile, analysts’ mean price target for Total stock has risen 8% to $72.30.

Analysts expect Total’s earnings to rise 11% this year, driven by Total’s expectation of its hydrocarbon volumes increasing 9%. In the first quarter, Total’s hydrocarbon output rose 9% YoY to 2.95 MMboed. The company’s key projects, Egina and Kaombo, began production, and Total made two important discoveries. Also, Total entered its Arctic LNG 2 (liquefied natural gas) project, invested in its Driftwood LNG project in the US, and signed an agreement for its Papua LNG project.

Company financials

Total’s financials also improved in the first quarter. Its net debt-to-EBITDA ratio of 0.9x was below peers’ average of 1.1x, but its total debt-to-capital ratio of 33% was above peers’ average of 29%. Total had more debt in its capital structure than peers, but its debt in terms of earnings capacity was lower—a good sign. Based on Total’s strong upstream portfolio and sound financials, analysts expect its earnings to rise.

Shell: Third-best upside potential of 29%

Shell has upstream, downstream, and integrated gas segments. The stock’s upside potential has risen in the past year as its price has fallen 8%. However, analysts’ mean price target for Shell stock has stayed at $81.50 over the past year. Analysts expect Shell’s EPS to grow 7% this year, and 11% YoY in the second quarter. Shell has a strong upstream portfolio, sound strategy, and robust downstream segment.

Several of Shell’s vital upstream projects have begun, including its Clair Phase 2 and Kashagan conventional oil and gas projects, deepwater projects in the Gulf of Mexico and Brazil, and its Prelude integrated gas project. Shell also began production at its megaproject Appomattox before schedule and below budget. The company expects the Permian region to add new net output of more than 0.3 MMboed this year.

Shell’s improving financials

Shell has enhanced its financial position. The company’s net debt-to-EBITDA ratio has fallen in the past four quarters to 1.2x, indicating that its debt position is improving. The company, which has focused on debt reduction, has a total debt-to-capital ratio of 32%.

Although Shell’s cash flow from operations could not cover its combined capex and dividend outflows in the first quarter, it had sufficient cash to fund the shortfall. Going forward, the company’s cash flow could switch to a surplus, driven by its strict cost and capital policy and focus on core assets.

BP: Upside potential of 27%

BP’s upside potential has risen in the past year due to analysts’ mean price target rising 1% to $50 and its stock price falling 11%. Analysts expect BP’s earnings to fall 13% this year due to crude oil prices falling. They expect BP’s EPS to fall 6% YoY in the second quarter. Whereas BP has lower expected earnings and weaker financials, it has a robust upstream portfolio.

BP’s financial position is weaker than peers’. In the first quarter, BP’s net debt-to-EBITDA ratio of 1.5x and total debt-to-capital ratio of 43% were the highest in its peer group—not a comfortable situation.

In the first quarter, BP’s cash shortfall stood at 31% (of its cash flow from operations), again the highest among peers. Chevron’s, ExxonMobil’s, Suncor’s, and Shell’s shortfalls were lower, at 3%, 4%, 1%, and 4%, respectively.

Since 2016, BP has begun 22 upstream projects. In 2019, 2020, and 2021, BP plans to launch 16 new projects. Overall, BP expects the new projects to contribute new net production of 0.9 MMboed by 2021.

ExxonMobil: Limited upside potential

ExxonMobil stock has 11% upside potential based on analysts’ mean price target. The stock has fallen 8% in the past year, while analysts’ mean price target for the stock has fallen 6% to $83.80.

Analysts expect ExxonMobil’s earnings to fall 24% this year due to weaker crude oil prices. Most analysts reduced their oil price estimate for the year due to fear of a supply glut in the global oil market. The oversupply concerns persist despite OPEC’s supply cuts. In the second quarter, analysts expect ExxonMobil’s EPS to fall 17% YoY.

ExxonMobil’s integrated earnings model

ExxonMobil’s vast upstream portfolio could bring long-term growth, and its low-cost LNG assets are set to tap rising global demand. The company plans to commence new LNG projects in Mozambique and Papua New Guinea. Plus, the company’s key upstream assets—deepwater projects in Guyana and Brazil and shale and tight oil assets in the US—are expected to bring growth.

ExxonMobil also has many ongoing downstream projects. The company’s integrated model optimizes the value of every molecule processed in its supply chain.

ExxonMobil’s sturdy financials

ExxonMobil has the strongest financial position among peers, with the lowest percentage of debt in its capital structure. Its total debt-to-capital ratio was 17% in the first quarter, and its net debt-to-EBITDA ratio has fallen in the past year, a good sign. ExxonMobil’s lower debt ratios show its intentions to uphold its balance sheet strength and flexibility through business cycles.

In the first quarter, ExxonMobil’s cash flow from operations of $8.4 billion fell $0.3 billion short of covering its capex and dividend outflow. The company raised funds to improve its liquidity position. Despite its debt rising, it still had the industry’s lowest debt-to-capital ratio, a favorable scenario.

Chevron: The lowest potential

Chevron stock has 11% upside potential based on analysts’ mean price target, and has risen 2% in the past year. However, analysts’ mean price target for Chevron stock has fallen 6% during the same period to $137.70. Jefferies has cut its price target on the stock from $152 to $145.

Analysts expect Chevron’s earnings to fall 6% this year due to oil prices falling. However, they expect Chevron’s EPS to rise 2% YoY in the second quarter.

Chevron has a robust upstream portfolio, with Permian Wheatstone and Gorgon expected to drive volume growth. Overall, Chevron expects its production volumes to grow 4%–7% this year, driven by its capex activities. In the first quarter, Chevron’s upstream volumes grew 7% YoY to 3.04 MMbeod.

Further, Chevron expects its downstream segment to support its margins and earnings. The company’s integrated earnings model aims to sustain its earnings in harsh conditions.

Chevron’s strong financials

Chevron’s financials improved in the first quarter. The company has the second-lowest percentage of debt in its capital structure after ExxonMobil. In the first quarter, Chevron’s total debt-to-capital ratio was 18%, whereas ExxonMobil’s was 17%. Chevron reduced its total debt in the first quarter. The company’s net debt-to-adjusted EBITDA ratio fell YoY from 1.3x to 0.7x.

Despite its cash flow shortfall in the first quarter, the company reduced its debt, a favorable sign. The decline in debt shows the company’s intention to strengthen its balance sheet and maintain financial flexibility.

Overview

Analysts believe Suncor stock has the highest upside potential, of 36%, followed by Total and Shell at 32% and 29%. They believe BP and ExxonMobil stocks have upside potential of 27% and 11%, respectively.

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