The progressive increase in global oil and gas demand, in conjunction with tighter supplies, could maintain a lofty price level in the near term. Given the industry tailwinds, investors could consider adding fundamentally strong energy stocks, TotalEnergies SE (TTE), Marathon Petroleum Corporation (MPC), and Valero Energy Corporation (VLO), currently beating Exxon Mobil Corporation (XOM), to their portfolios.
Despite the macroeconomic and geopolitical pressures, the energy sector remained resilient. Global oil demand achieved a milestone in June 2023, and it continued to climb, with a 0.2 MMb/d month-over-month increase registered in August, reaching 101.4 MMb/d.
According to the IEA Oil Market Report (OMR), this demand is predicted to rise by 2.2 mb/d year-over-year, touching 102.2 mb/d this year. China, the world’s largest oil importer, is in line to see its oil demand peak within the next three to five years, as predicted by research firm Wood Mackenzie and China’s state oil majors.
Potential market influences arise from Russia and Saudi Arabia’s extended oil production cuts, pushing prices up. In response to this, Morgan Stanley has recently revised its Brent oil price forecasts for 2023 and 2024 upward.
The recent price surges could be attributed to China’s Golden Week holiday, which saw a surge in fuel demand due to heightened domestic and international travel, boosting Chinese oil consumption. Additional support for oil prices came from the shrinking U.S. storage levels at Cushing, Oklahoma.
Oil industry heavyweight XOM, sporting a market cap of $476.27 billion, has expanded its refining capacity and is concentrating on higher-margin chemicals, owing to which the company appears poised for a breakthrough driven by a positive outlook toward energy assets. It anticipates its motor fuels and chemicals earnings to hit $16 billion by 2027, about $4 billion more than present figures – because of consistently increasing demand.
XOM is steering its operations toward greater sustainability, evident from its move to purchase Denbury Inc. (DEN) for $4.9 billion. This could fast-track its commitment to energy transition via a ready-made carbon dioxide (CO2) sequestration operation.
However, XOM may face legal challenges. Together with several other oil giants, XOM has been accused by the California state of allegedly understating the risks associated with fossil fuels. This lawsuit follows a series of similar ones filed against fossil fuel corporations for their environmental impact.
For the second quarter that ended June 30, 2023, XOM’s total revenues and other income came in at $82.91 billion, down 28.3% year-over-year, while the company’s attributable net income and EPS declined 55.9% and 53.9% from the prior-year quarter to $7.88 billion and $1.94, respectively.
However, cash and cash equivalents for the six months that ended June 30, 2023, increased 56.7% year-over-year to $29.56 billion. Also, as of June 30, 2023, the company’s total current liabilities stood at $61.82 billion, compared to $69.05 billion as of December 31, 2022.
XOM’s stretched valuation is evident from its forward non-GAAP P/E and EV/EBITDA multiples of 12.52 and 6.77, which are 16.6% and 14.6% higher than the industry averages of 10.74 and 5.90, respectively.
XOM’s weak profitability is justified by its trailing-12-month gross profit and EBITDA margins of 34.38% and 21.51%, which are 28.5% and 44.4% lower than the industry averages of 48.09% and 38.69%, respectively.
Furthermore, the stock has gained 32.6% over the past year to close its last trading session at $117.58. However, it declined 1.6% intraday. It’s no surprise that XOM is rated B (Buy) in our proprietary POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Given this backdrop, let's delve into the fundamentals of the three Energy - Oil & Gas stocks, beginning with the third choice, which could be better picks than XOM now.
Stock #3: TotalEnergies SE (TTE)
Headquartered in Courbevoie, France, TTE is a multi-energy company that produces and markets fuels, natural gas, and electricity in France, the rest of Europe, North America, Africa, and internationally. It operates through Integrated Gas, Renewables & Power; Exploration & Production; Refining & Chemicals; and Marketing & Services segments.
Recently, TTE acquired France’s agrivoltaics leader Ombrea. By integrating Ombrea's teams and expertise into its renewable activities, TTE intends to accelerate its agrivoltaics development in France and abroad.
Under the Ombrea brand, TTE would offer the farming community solutions for combining solar power and agricultural production, including solutions for protecting against weather events, maintaining or even improving yields, and adapting to climate change.
This acquisition will also enable TTE to accelerate the development of its portfolio of 1.5 GW of agrivoltaic projects that meet the criteria set out under the French Renewable Energy Acceleration Law adopted in March 2023.
On September 27, TTE was awarded a contract for the installation and operation of 1100 high-power charge points (HPC) for electric vehicles (up to 200 kW) as part of the German government's tender for the "Deutschlandnetz" ("Germany network"). These charging points will be grouped in "EV hubs" at 134 locations in eastern, central, and western Germany. This should bode well for the company.
TTE’s Board of Directors confirmed for 2023 a shareholder distribution of more than 40% of cash flow. The Board decided the distribution of a second interim dividend for the 2023 financial year in the amount of €0.74 per share, up 7.25% year-on-year, and authorized the company to buy back shares for $2 billion in the third quarter of 2023.
TTE pays $3.10 annually as dividends, which translates to a yield of 4.71% at the current price level. Its four-year average dividend yield is 6.65%.
TTE’s trailing 12-month levered FCF margin of 10.28% is 57.8% higher than the industry average of 6.52%. Moreover, the trailing 12-month cash from operations of $38.50 billion is significantly higher than the industry average of $653.45 million.
TTE’s revenue grew at CAGRs of 17.8% and 7.3% over the past three and five years, respectively. In addition, its operating income (EBIT) grew at 73% and 20% CAGRs over the same periods, respectively.
TTE’s revenues from sales stood at $51.53 billion in the fiscal second quarter that ended June 30, 2023. Its adjusted net income and net income per share were $4.96 billion and $1.99, respectively, while adjusted EBITDA stood at $11.11 billion. As of June 30, 2023, TTE’s total current liabilities stood at $89.74 billion, compared to $109.78 billion as of December 31, 2022.
Analysts expect TTE’s revenue and EPS to be $49.51 billion and $2.48 for the fiscal third quarter ending September 2023. For the fiscal year ending December 2023, its revenue and EPS are expected to come at $220.07 billion and $9.72, respectively.
The stock has gained 43.4% over the past year to close the last trading session at $65.76. Over the past three months, it has returned 15.3%.
TTE’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
TTE has an A grade for Momentum and a B in Stability and Quality. It is ranked #13 out of 89 stocks within the Energy - Oil & Gas industry.
Click here for TTE’s additional POWR Ratings for Growth, Value, and Sentiment.
Stock #2: Marathon Petroleum Corporation (MPC)
MPC is involved in midstream and downstream businesses, such as petroleum product refining, marketing, and retail in the United States. The company operates through two segments: Refining & Marketing and Midstream transport.
On September 11, MPC paid its shareholders a quarterly dividend of $0.75 per share on the common stock. Its annual dividend of $3 per share translates to a 1.98% yield on the current price level. Its dividends have grown at 9.7% and 11% CAGRs over the past three and five years, respectively. Its four-year average dividend yield is 3.91%.
MPC’s trailing-12-month cash from operations of $14.94 billion is significantly higher than the industry average of $653.45 million. Likewise, its trailing 12-month ROCE, ROTC, and ROTA of 48.70%, 17.43%, and 14.75% are 125.8%, 64.3%, and 82.9% higher than the industry averages of 21.57%, 10.61%, and 8.06%, respectively.
MPC’s revenue grew at CAGRs of 20.5% and 14% over the past three and five years, respectively. In addition, its operating income (EBIT) grew at 201.5% and 30.9% CAGRs over the past three and five years, respectively.
For the fiscal second quarter that ended June 30, 2023, MPC’s total revenues and other income stood at $36.82 billion, while its adjusted EBITDA amounted to $4.53 billion. Net income attributable to MPC and EPS stood at $2.23 billion and $5.32, respectively.
Its Midstream segment income from operations increased 6.7% year-over-year to $1.20 billion. Its Midstream segment adjusted EBITDA rose 5.2% from the year-ago value to $1.53 billion. Also, the company generated $4 billion of net cash provided by operating activities, reflecting sustained commercial improvements.
Analysts expect MPC’s revenue and EPS for the fiscal year ending December 2023 to come in at $150.49 billion and $23.57, respectively. It topped the consensus EPS estimates in each of the trailing four quarters.
The stock has returned 53.3% over the past year to close the last trading session at $151.34. Over the past three months, it has gained 30.1%.
MPC’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to Buy in our proprietary rating system.
MPC has an A grade for Quality and a B for Momentum. MPC ranks #7 within the same industry.
Beyond what we mentioned above, click here to see the additional POWR Ratings for Growth, Value, Stability, and Sentiment for MPC.
Stock #1: Valero Energy Corporation (VLO)
VLO manufactures, markets, and sells transportation fuels and petrochemical products worldwide. It operates through three segments: Refining; Renewable Diesel; and Ethanol. The company produces CARB diesel, diesel, jet fuel, asphalt, aromatics, and sulfur crude oils.
On September 5, VLO paid its shareholders a quarterly dividend of $1.02 per share. The company’s annual dividend of $4.08 translates to a 2.88% yield on the prevailing prices, while its four-year average dividend yield is 4.87%.
Its dividend payouts have grown at CAGRs of 1.7% and 5.4% over the past three and five years, respectively. It has a record of paying dividends to its shareholders for 25 consecutive years.
VLO’s trailing-12-month ROCE, ROTC, and ROTA of 46.57%, 25.08%, and 18.03% are 115.9%, 136.4%, and 123.6% higher than the industry averages of 21.57%, 10.61%, and 8.06%, respectively.
VLO’s revenue grew at CAGRs of 22.5% and 8.4% over the past three and five years, respectively. In addition, its levered free cash flow grew at 71.4% and 23.1% CAGRs over the past three and five years, respectively.
For the fiscal second quarter that ended on June 30, 2023, VLO’s revenues amounted to $34.51 billion, while its operating income stood at $2.76 billion. During the same quarter, the company’s attributable net income and earnings per common share stood at $1.94 billion and $5.40, respectively.
Also, its cash and cash equivalents amounted to $5.08 billion, compared to $4.86 billion as of December 31, 2022.
The consensus EPS estimate of $7.76 for the fiscal third quarter (ending September 2023) represents an 8.8% improvement year-over-year. At the same time, the consensus revenue estimate for the same period is $38.16 billion. Moreover, the company has an excellent earnings surprise history, surpassing the EPS estimates in each of the trailing four quarters.
The stock has gained 32.1% over the past year and 21.5% over the past three months to close the last trading session at $141.71.
It’s no surprise that VLO has an overall rating of B, which equates to Buy in our proprietary rating system. It has a B grade for Value, Momentum, and Quality. Within the Energy - Oil & Gas industry, it is ranked #2.
In addition to the POWR Ratings we’ve stated above, we also have VLO’s ratings for Growth, Stability, and Sentiment. Get all VLO ratings here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
XOM shares were unchanged in premarket trading Monday. Year-to-date, XOM has gained 9.23%, versus a 12.85% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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