Rising oil prices boosted energy stocks on September 16, as the drone attack on Saudi Aramco’s oil field propelled oil prices by about 10%. Notably, about half of Saudi Arabia’s oil production has been impacted.
Saudi Arabia is one of the major oil producers in the world. Unsurprisingly, oil prices rose following the disruption in Saudi Arabia’s oil supply. To learn more, read Where Oil Could Head after Attacks on Saudi Arabia?
Oil prices impact energy stocks
Soaring oil prices have boosted ExxonMobil (XOM), Chevron (CVX), Royal Dutch Shell (RDS.A), and BP (BP) stocks. On September 16, BP stock is trading up by about 5.2%, followed by ExxonMobil, which is up by 3.3%. Shell and Chevron stocks are trading up by 3.1% and 3.0%, respectively.
This recovery has brought some respite to energy stocks, which have been beaten down during the quarter. In the third quarter, ExxonMobil and Chevron’s stock prices have declined by 5.2% and 2.4%, respectively. Shell and BP have fallen sharply by 12.6% and 9.2%, respectively.
Oil prices impact energy stocks, as they determine these companies’ upstream earnings. Although integrated energy stocks have other business segments like downstream, their upstream segments contribute a significant portion to their profits.
Wall Street analysts expect energy companies’ 2019 earnings to fall due to lower oil price estimates. Although geopolitical tensions could disrupt the oil supply in the short term, analysts expect the market to remain oversupplied in the long term. Notably, the IEA (International Energy Agency) expects a global oil supply glut in 2020.
Earnings outlook, valuations, dividend yields of energy stocks
With such a bleak oil outlook, analysts expect ExxonMobil and Chevron’s earnings to fall 31% and 10%, respectively, in 2019. They expect Shell and BP’s earnings to fall 3% and 17%, respectively.
However, in 2020, analysts expect Shell and BP’s earnings to rise 22% and 20%, respectively. Also, they expect ExxonMobil and Chevron’s earnings to increase 37% and 17%, respectively.
In the next two years, analysts forecast CVX, Shell, and BP’s respective earnings to rise 5%, 18%, and 1%, but they expect XOM’s earnings to fall 5%.
Due to the decline in oil prices in the current quarter, these companies’ valuations have also weakened. Among the energy stocks, ExxonMobil and Chevron are trading at higher forward PE multiples of 17.0x and 15.3x, respectively. Shell and BP have forward PE multiples of 9.9x and 10.4x, respectively.
Of these companies, Shell has the highest dividend yield of 6.7%, followed by BP with a 6.5% yield. ExxonMobil and Chevron’s dividend yields stand at 4.8% and 3.9%, respectively.
Wall Street analysts’ mean price target on ExxonMobil and Chevron stand at $81 and $138, respectively, implying upside potential figures of 7% and 14%. However, analysts’ mean price targets on Shell and BP stand at $78 and $51, respectively, which shows higher upside potential figures of 37% and 34%.
Overview: Oil prices
The rise in oil prices has provided hope that the oil price scenario could improve. With their robust upstream portfolios, these companies could encounter a boost in earnings if oil prices rise.
Chevron has seen record output with a 9% rise in its upstream volumes in the second quarter. ExxonMobil, Shell, and BP also saw increases of 7%, 4%, and 7%, respectively, in their upstream volumes in the quarter.
To learn more about investment opportunities in the energy sector, please read ExxonMobil or Chevron: Which Is the Better Buy? If you’re considering investing in Shell, please read Shell Stock Near Its 52-Week Low: Right Time to Invest?