Undeniably, one of the biggest news stories on Wall Street in 2014 was the steep drop in oil prices that came as the year drew to a close. With quotations for the commodity continuing their descent through the first days of 2015, the oil slump will, in all likelihood, dominate headlines in the New Year, too. But just what does this mean for oil stocks and investors sitting on the edge of their seats, waiting for the story to unfold? In the following report, we weigh in on the situation and point out how this could open up investment opportunities for those looking to add a Dow energy component to their well-balanced portfolios.
Indeed, after reaching a high of over $100 per barrel back in June, 2014, U.S. (or WTI) crude oil prices tanked to levels not seen since 2009, to around $58 a barrel by the end of last year and to below $50 in the opening week of 2015 (at the time of this writing). Brent (international) crude oil has been following a similar pattern. It seems an abundance in the overall supply of the resource is largely to blame for the sharp retreat of late. A number of factors, including sagging global demand, highlighted by slower economic growth in China and Europe, dissension within OPEC over output levels, and increased production in the United States, helped by more-efficient extraction methods of hydrofracking and horizontal drilling, have led to the glut. For a change, consumers have gotten the better end of the deal, as prices at the gas pump have declined considerably over the past year. And homeowners can look forward to lower bills, as the heating season kicks into high gear.
The recent events are certainly worrisome, however, as many wonder whether oil’s fall from grace is temporary or here to stay, and what impact it will have on the broader financial markets. Yet, despite the less auspicious conditions shaping up in the energy sector, the industry heavyweights, namely Dow components Exxon Mobil (XOM – Free Exxon Stock Report) and Chevron (CVX - Free Chevron Stock Report), seem to be positioned well enough to withstand the recent turmoil. While the lower prices have pressured oil and field performance for the two giants, both are benefiting from better margins within their refining operations. The natural gas side of the business should also lend a hand over time, though a ramp up in production there will depend on firmer prices for that resource. Other avenues of growth are being pursued, as well. To wit, both companies have major capital spending projects in the works to help ensure reserves stay at healthy levels, when demand hopefully improves. From an investment perspective, the latest developments and accompanying market volatility could work to investors’ favor in the long run, creating a viable entry point for XOM and CVX. Thus, we wouldn’t necessarily dismiss either one of these solid blue chips.
In comparing the Value Line pages for Chevron and Exxon, we note that both Dow components have strong similarities, with subtle differences. To begin with, investors can glean from the Business Blurb, which contains a brief business description of each company, among other details and background information, that both produce oil and natural gas. Daily production volume in 2013 put XOM ahead of its smaller competitor, with 2.2 million barrels of “black gold” and 11.8 billion cubic feet of natural gas.
The price charts, or Graphs showing share-price movements over the past 12-plus years, look nearly alike for the two stocks, though Chevron displays a slightly steeper climb. Both companies are also highly profitable, as evidenced by the figures displayed in the Quarterly Earnings Per Share box and the Statistical Array. While earnings are likely to be lackluster or stumble a bit (in the case of XOM) through 2015, amid the oil price rout of late, a rebound is expected over the coming 3- to 5-year period. That’s consistent with the views expressed by the covering analysts in the Commentary that investments in oilfield projects, coinciding with improved industry trends, should eventually pay off.
In terms of valuation, the Price/Earnings and relative Price/Earnings ratios (located in the Top Label) of the two don’t differ that much, though the numbers are higher for Exxon. This implies that, at its current price, XOM stock is a tad more expensive on a price-to-earnings basis, versus CVX. Still, the relative P/Es for these two blue chips indicate that they compare favorably to the median estimated P/E of all stocks under Value Line review, as the metric is less than 1.00 in both cases.
Investors should also be pleased knowing that both XOM and CVX pay handsome dividends, as shown by the dividend yield on the right side of the Top Label, with specific amounts included in the Quarterly Dividend box and Array. At 3.6%, Chevron’s yield clearly exceeds that of Exxon (3.0%), suggesting the equity offers a higher expected return from cash distributions over the coming 12 months than its much-larger Texas-based rival. Dividend growth rates for both Dow members, however, are reasonable and roughly on par, at just below 10%, as exhibited in the Annual Rates box.
Finances for both companies are in excellent shape, which make it possible to reward shareholders through dividends or stock buybacks. Each sports a superlative grade of A++ for Financial Strength (see Ratings box). The two are flush with cash and have a very manageable level of long-term debt, as displayed in the Capital Structure and Current Position boxes. In the meantime, each boasts a top-notch Safety rank of 1 (Ranks box). The measure factors in Financial Strength and Stock Price Stability (also in the Ratings box), for which CVX and XOM score 90 or above (out of a range of 100). The risk profiles for the two energy blue chips, therefore, make either of them ideal for conservative players.
Interestingly, although most Dow members typically don’t stand above the crowd for year-ahead price performance, CVX beats XOM in this regard, with a Timeliness rank (Ranks box) of 2, Above Average. XOM only gets a rank of 3 (Average). This means CVX has short-term appeal.
Still, both Dow energy issues should pique the interest of long-term, income-minded investors. That’s despite the recent oil price dip. In fact, XOM and CVX both offer fairly solid total return prospects (see Projections box), on a risk-adjusted basis, though the former has a slight edge over its peer. Remember that this calculation takes into account 3- to 5-year estimated price appreciation and prospective dividends for that time frame.
Summing it all up, we believe both CVX and XOM remain good defensive picks for conservative patient types, with some income to boot. The sentiment is echoed by analysts Jeremy Butler and Robert Mitkowski, Jr. in the Commentary section of the Value Line reports. Hence, investors may want to take advantage of share-price weakness to add these blue chips to their core holdings.