Leading integrated energy stocks are falling in the current quarter. While ExxonMobil (XOM) and Chevron (CVX) stocks have fallen 2.7% and 0.4%, respectively, quarter-to-date, Royal Dutch Shell (RDS.A) and BP (BP) have fallen 1.8% and 0.6%, respectively. The energy sector seems to be reeling under weak third-quarter earnings.
Now, as energy companies are facing 2020, let’s analyze which look to be well placed. We’ll examine these companies on three primary criteria: growth, dividend yield, and valuation.
Energy stocks: Earnings set to grow in 2020
Despite bleak earnings in 2019, energy stocks are looking at robust profits in 2020. In the next year, Wall Street analysts expect ExxonMobil’s earnings to rise the most, by 42%. It’s followed by Shell and BP, for which analysts expect 20% and 15% earnings growth, respectively. Analysts expect Chevron’s earnings to rise the least, by 8%, in 2020.
Optimism for next year is the result of the expectation of a recovery in oil prices. Though analysts still expect a supply glut, it could improve with geopolitical movements, macro activities, and OPEC’s supply stance. Plus, rises in these companies’ crude oil and natural gas production should support their earnings. In 2019, all four oil companies have seen increases in their output.
Chevron’s production rose the most by 6.0% YoY (year-over-year) to 3.05 MMboepd (million barrels of oil equivalent per day) in the first nine months of 2019. ExxonMobil’s and BP’s outputs grew 4.1% YoY and 4.2% YoY, respectively, to 3.9 MMboepd and 2.6 MMboepd in the same period. Shell’s production rose 0.2% YoY to 3.6 MMboepd in the first nine months of the year.
Also, in terms of downstream operations, refining margins could improve on the implementation of IMO 2020. ExxonMobil’s Neil Hansen, vice president of investor relations, said, “You are starting to see certainly early transition with IMO on the product side. We’ve seen high sulfur fuel oil cracks, or significantly the clean/dirty spreads, I think recently we reached near 10-year highs. And so I think the market will be dynamic in the early stages of this transition, but certainly on the product side, you’re already seeing some of that widening of that spread and the forward curves are indicating that as well.”
Better crude oil prices, higher hydrocarbon production, and stronger refining conditions could support these companies’ earnings in the next year.
Lower estimated earnings in 2019
Though ExxonMobil seems like it’ll be the strongest in terms of 2020 earnings, it’s the weakest in terms of 2019 earnings. In the current year, analysts expect ExxonMobil’s earnings to fall 45%. They expect Shell’s, BP’s, and Chevron’s earnings to fall 10%, 22%, and 18%, respectively, in 2019.
The expected falls in these energy companies’ earnings are the result of lower oil prices weighing on their upstream realizations and earnings. Plus, chemical operations have been facing weaker margin conditions in the year.
So, will earnings rise in these two years?
In terms of the total change in 2019 and 2020, analysts expect Shell’s earnings to rise 8%. However, they expect BP’s, Chevron’s, and ExxonMobil’s earnings to fall 11%, 11%, and 22%, respectively.
Energy stocks’ dividend yields
Among the four oil stocks under consideration, Shell has the highest dividend yield of 6.5%, followed by BP’s 6.4%. ExxonMobil and Chevron have relatively low yields of 5.1% and 4.0%, respectively.
These energy companies have consistently paid dividends. While Shell’s and BP’s dividend payments have remained stable YoY, ExxonMobil’s and Chevron’s dividends have risen. Shell and BP are set to pay $0.94 and $0.615 per American depositary receipt in the fourth quarter. Further, in the quarter, ExxonMobil will pay a dividend of $0.87 per share, which shows 6.1% YoY growth. Also, Chevron will pay a dividend of $1.19 per share in the fourth quarter, reflecting a 6.3% YoY rise.
Valuation: Which energy stock is trading at a reasonable level?
The average forward PE of XOM, CVX, RDS, and BP stands at 14.2x. ExxonMobil and Chevron are trading at 18.0x and 17.2x, respectively, higher than the average.
ExxonMobil and Chevron are trading at high valuations due to their long-standing history of facing oil cycles. Despite the volatile nature of their businesses, their balance sheets remain strong.
Both companies have low debt in their capital structures. ExxonMobil’s and Chevron’s total debt-to-capital ratios stood at 19.3% and 17.4%, respectively, in the third quarter. These were the lowest levels in the industry on a global level.
Chevron is also a step up in terms of its liquidity position. In the first nine months of 2019, the company had more than enough operating cash flows to cover its main expenses such as dividends and capex. To learn more, read XOM or CVX: Better Buy on Leverage, Liquidity, Growth?
However, Shell and BP are trading at 10.5x and 11.2x, respectively, below the average. These companies have relatively high debt on their balance sheets. While Shell’s debt ratio stood at 31.6% in the third quarter, BP’s ratio stood at 43.0%.
Overall: Which energy stock should you buy?
Shell looks quite well positioned. It has the highest dividend yield among its peers. Plus, analysts expect its earnings to grow in the consolidated 2019 and 2020 period. Finally, it’s also trading at a reasonable valuation.
Beyond Shell, Chevron and BP both have some weaknesses. While BP struggles with high debt, Chevron’s earnings outlook seems dull.
BP has a higher dividend yield, a lower valuation, and a better earnings outlook than ExxonMobil. However, the company will have to work on its debt levels to reach the comfort zone.
Further, analysts expect a low fall in Chevron’s earnings in the consolidated period. However, it has the lowest dividend yield and the second-highest valuation.
ExxonMobil comes in last with the highest fall in its profits in the consolidated period, a moderate dividend yield, and the highest valuation.