The continued easing of pandemic-induced restrictions has been leading a reopening of industrial activities and, thus, driving rising energy consumption this year. According to the EIA, the global consumption of petroleum and liquid fuels will average 97.7 million b/d for all 2021, which is a 5.4 million b/d increase from 2020. Furthermore, the global oil and gas EPC market is expected to chart a 5% CAGR from 2019 to 2027.
Investors’ increased optimism about the industry’s growth prospects is evident in the Vanguard Energy ETF’s (VDE) 56% returns over the past year, compared to SPDR S&P 500 ETF Trust’s (SPY) 45.5% gains over this period.
However, increased federal scrutiny of energy companies’ efforts to transition to solar and wind, coupled with the further tightening of policies and rising carbon taxes, could mar the industry’s growth. While energy companies China Petroleum & Chemical Corporation (SNP) and Exxon Mobil Corporation (XOM) are well positioned to weather these challenges and capitalize on secular tailwinds, we think ConocoPhillips (COP) and EOG Resources, Inc. (EOG) could struggle to stay afloat in the near-term owing to their weak financials.
Stocks to Buy:
China Petroleum & Chemical Corporation (SNP)
SNP is one of the largest integrated energy and chemical companies in China. It operates through five segments: Exploration and Production, Refining, Marketing and Distribution, Chemicals, and Corporate and Others. The company explores and develops oil fields, produces crude oil and natural gas, processes and purifies crude oil, and manufactures and sells petroleum products.
In March, SNP accelerated hydrogen energy development and decided to put more effort into top-level design, core technology R&D, standard system formulation and industrial policy support. The company will also be promoting clean energy construction through accelerating the transformation of hydrogen sources. This should help SNP to achieve its goal of building a world-leading clean energy chemical company.
SNP’s turnover and other operating revenues increased 4.1% year-over-year to RMB 576.98 billion ($89.56 billion) in the first quarter, ended March 31. Its operating profit increased 208.6% from its year-ago value to RMB 28.70 billion ($4.45 billion), while its profit for the period rose 215.6% year-over-year to RMB 23.62 billion ($3.67 billion). Its EPS increased 196.2% year-over-year to RMB 0.153.
A$8.40 consensus EPS estimate for 2021 indicates a 112.1% improvement year-over-year. The $398.81 consensus revenue estimate for the current year represents a 24.8% increase year-over-year. SNP’s stock has gained 14.4% over the past year.
SNP’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B grade, which equates to Buy in our proprietary ratings system. The POWR Ratings are calculated by considering 118 different factors, with the weighting of each optimized to improve overall performance.
The stock has a B grade for Value, Growth and Stability. Among the 93 stocks in the Energy – Oil & Gas industry, it is ranked #11. In total, we rate SNP on eight different components. Beyond what we’ve stated above, we have also given SNP grades for Momentum, Sentiment and Quality. Get the rating here.
Exxon Mobil Corporation (XOM)
Based in Texas, XOM is one of the world’s largest publicly traded energy providers and chemical manufacturers. It develops and applies next-generation technologies to help safely deliver its products. It operates through Upstream, Downstream, and Chemical segments, and as of December 31, 2020, it had approximately 22,239 net operated wells with proved reserves.
Last month, XOM released a detailed investor presentation stating the company’s strategy to capitalize on its industry-leading resources to drive earnings and cash flow growth, maintain a strong dividend, reduce debt and invest in lower-emission technologies. The strategy should help it meet the society’s needs while boosting XOM’s revenue generation prospects.
The company’s revenue and other income increased 5.3% year-over-year to $59.15 billion for the first quarter, ended January 31, while its net income grew 547.5% year-over-year to $2.73 billion over the same period. Its EPS increased 557.1% year-over-year during the quarter to $0.64.
XOM is expected to witness 67.5% revenue growth year-over-year to $63.92 billion in the current quarter, ending June 30, 2021. Its EPS is estimated to increase 1187.9% from its year-ago value to $3.59 in the current year. XOM’s stock has gained 43.7% over the past year.
XOM’s strong fundamentals are reflected in its POWR Ratings. The stock has a B grade for Growth and Quality. Click here to see the additional POWR Ratings for XOM. (Momentum, Stability, Sentiment and Value).
Stocks to Sell:
COP is one of the world’s largest independent companies in the exploration and production of oil and natural gas. The company engages primarily in the operation of conventional and tight oil reservoirs, shale gas, heavy oil, LNG, oil sands, and other production operations. Its operations are spread across 15 countries.
In January, COP completed its acquisition of Concho Resources in which each share of Concho common stock will be exchanged for the right to receive 1.46 shares of ConocoPhillips common stock at the effective time of the merger. Although this acquisition could help the company to build momentum to emerge as a sector leader, it has incurred substantial expenses that could negatively impact its cash balance and liquidity position.
COP’s trailing-12-month EV/Sales currently stands at 3.86x, which 27.6% higher than the 3.02x industry average. The company’s 2.05x forward Price/Sales is 34.9% higher than the 1.52x industry average.
COP’s operating costs have increased 24.6% sequentially to $1.77 billion for the fiscal first quarter, ended March 31, while the company’s total liquidity has decreased 8.2% sequentially to $12.64 billion over the period.
Analysts expect COP’s revenue estimate to come in at $34.83 billion in the fiscal period ending December 2022, indicating a 6.2% decline year-over-year. The stock has declined 18.8% over the past three years.
COP’s POWR Ratings are consistent with this bleak outlook. COP has a C grade for Value, Quality and Stability. Of the 93 stocks in the same industry, it is ranked #27.
To see the additional POWR Ratings for Momentum, Growth and Sentiment for COP, click here.
EOG Resources, Inc. (EOG)
Formerly known as Enron Oil & Gas Company, EOG is engaged in the exploration and production of crude oil, natural gas, and natural gas liquids. The company’s principal production areas are in New Mexico, Texas, the Republic of Trinidad and Tobago, the People’s Republic of China, and the Sultanate of Oman. As of December 31, 2020, it had total estimated net proved reserves of 3,220 million barrels of oil equivalent, 813 MMBbl of natural gas liquid reserves, and 5,360 billion cubic feet of natural gas reserves.
COP’s forward EV/Sales currently stands at 3.46x, which is 33.5% higher than the 2.59x industry average. The company’s 3.32x forward Price/Sales is 118.1% higher than the 1.52x industry average.
In its first fiscal quarter of 2021, EOG’s total operating and other revenue decreased 21.8% year-over-year to $3.69 billion. Furthermore, its cash from operating activities came in at $1.87 billion over the same period, representing a 27.8% decline year-over-year. EOG’s stock has declined 30.4% over the past three years.
EOG’s weak prospects are apparent in its POWR Ratings. EOG also has a D grade for Value, and a C grade for Sentiment and Stability. In the same industry, the stock is ranked #19.
In addition to the POWR Ratings grades we’ve just highlighted, one can see EOG’s ratings for Quality, Growth and Momentum here.
XOM shares were trading at $61.55 per share on Monday afternoon, up $0.78 (+1.28%). Year-to-date, XOM has gained 54.07%, versus a 11.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Samiksha Agarwal
Samiksha Agarwal has always had a keen interest in financial markets. This has led her to a career as a financial journalist. Through her extensive knowledge of fundamental analysis, her goal is to help investors identify untapped investment opportunities in the stock market. More…