Integrated energy stocks Royal Dutch Shell (RDS.A), Chevron (CVX), ExxonMobil (XOM), and BP (BP) have fallen in August. The stocks have fallen due to the crashing equity market and lower crude oil prices. So far in August, the S&P 500 Index (SPY) has fallen 4.2%, while crude oil has fallen 7.5%. The trade war between the US and China is taking a toll on the equity and oil market.
Investing in energy stocks
Such scenarios present an opportunity to invest in high growth stocks at reasonable valuations. Let’s evaluate these companies’ earnings prospects and valuations to learn why they’re attractive.
In August, Shell has fallen 12.3%. Lower second-quarter earnings and weaker equity and oil markets hammered Shell stock. The company also missed its earnings estimate for the quarter. The lower stock beat down the company’s forward PE ratio to 9.9x. BP (BP), which beat the earnings estimate, has fallen 8.9% in August. The company’s forward PE ratio is 9.9x.
While ExxonMobil’s (XOM) earnings beat the estimate, Chevron (CVX) missed the estimate. ExxonMobil and Chevron stocks have fallen 9.2% and 6.4%. ExxonMobil trades at 16.2x its forward PE ratio, while Chevron trades at 14.7x its forward PE ratio.
Energy sector companies’ earnings fell due to weaker upstream realizations and lower downstream margins. However, a few of them had higher upstream production, which helped their earnings. While Chevron, Shell, and BP’s profits fell across their business segments, ExxonMobil’s earnings rose in its Upstream segment.
Energy stocks earnings will likely fall in 2019
Analysts expect energy companies’ earnings to fall in 2019. The lower earnings estimate is driven by a fall in crude oil’s price estimate for the year. While analysts expect ExxonMobil and BP’s earnings to fall 30% and 16%, they expect Chevron and Shell’s earnings to fall 8% and 3%.
Analysts expect energy stocks’ earnings to rise in 2020
Analysts expect these companies’ earnings to rise in the next year. Overall, analysts expect oil prices to recover. According to analysts, ExxonMobil and Shell’s earnings will likely rise 38% and 22% in 2020. They expect BP and Chevron’s earnings to increase 20% and 19% next year. These companies have strong upstream portfolios, which could drive hydrocarbon volumes growth.
Chevron’s volumes could grow 4%–7% in 2020. In 2019, Shell’s projects will likely add a new net output of more than 300,000 barrels of oil equivalent per day. For BP, the projects, which started in 2016, will likely contribute new production, net to BP, of about 900,000 barrels of oil equivalent per day by 2021. ExxonMobil has a promising upstream portfolio, which could generate long-term growth.
Consolidated scenario for 2019 and 2020
So, with an estimated fall in earnings in 2019 and a subsequent rise in 2020, it makes sense for investors to look at energy stocks’ consolidated earnings growth for the next two years.
On consolidated earnings growth, analysts expect Shell to post the highest increase of 19% from 2018 to 2020. Shell’s strong strategy, upstream portfolio, and the critical downstream segment will likely support the company’s earnings growth.
Analysts expect Chevron’s earnings to rise 9% during the same period. Chevron has a strong upstream portfolio. The company’s assets at Gorgon, Wheatstone, and the Permian will likely drive its volumes growth. Chevron’s downstream portfolio will support its earnings growth. Chevron has built an integrated earnings model to support its total earnings in harsh business conditions.
However, analysts expect a dull performance from BP and ExxonMobil in the next two years. While analysts expect BP’s earnings to rise 1%, they expect ExxonMobil’s earnings to fall 3%.
What should investors do?
The recent slump in energy stocks provides investors with the right opportunity to invest in well-placed stocks. Shell, with the highest growth of 19% over the next two years, looks like an attractive investment option. The stock also has a 6.8% dividend yield. Chevron is the second-best choice with 9% growth over the next two years.
Maitali Ramkumar doesn’t hold any positions in the above-mentioned energy stocks.