Surging crude oil demand and constrained supply due to decreased production are anticipated to increase crude oil prices. It is forecasted to stimulate vigorous investor activity within the energy sector.
Therefore, in this article, I have evaluated energy stocks Exxon Mobil Corporation (XOM) and Baker Hughes Company (BKR) to identify the better investment to capitalize on the sector's tailwinds. Based on a comprehensive fundamental comparison outlined below, BKR could be a better buy than XOM for September.
Amid intricate global economic networks fraught with uncertainty and shifting geopolitical terrain, the energy sector continues to display robust fundamentals. The global energy watchdog, the International Energy Agency’s (IEA) energy report, revealed that global oil demand surged to a record high of 103 mb/d in June and predicted the demand could hit another peak in August.
Bloomberg projects that the demand for gasoline and diesel for road transport in the U.S. and Europe has peaked, while China’s demand is predicted to reach its apex in 2024. The United States secures its position as the world’s top oil consumer, averaging 19.1 million BPD in 2022.
The U.S. oil demand, strikingly resilient, has exceeded prior projections. Based on Standard Chartered commodity analysts' data, gasoline and jet fuel demand, closely associated with household behavior, rose significantly. Compared to initial yearly expectations by the Energy Information Administration, gasoline demand has seen an annual increase of 98 kb/d.
Other crucial factors impacting supply and demand dynamics include production cuts orchestrated by OPEC+ and Russia and extensive inventory draws. These elements indicate a potential escalation in oil prices. Further implicating price dynamics is the advent of Hurricane Idalia, applying a transient but consequential upward pressure on oil prices recently.
Barclays predicts that the slower growth of American shale and continuous underproduction from several OPEC+ contributors will constrict the oil market further in 2024. Projections for Brent crude underscore this trend, with prices expected to inflate by $8 to $97 a barrel throughout the coming year.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has gained 23.9% over the past three months and 3.1% over the past five days, substantiating investors’ interest.
In terms of price performance, BKR has gained 43.9% over the past year, whereas XOM has gained 15.1%. However, over the past six months, BKR has gained 13.7% to close the last trading session at $36.05, while XOM plunged marginally to close the last trading session at $110.88.
Here are some reasons why BKR could be a better buy for September:
Latest Development
On August 08, BKR announced a memorandum of understanding (MoU) with Avports, an airport management and operations company, to develop, implement, and operate onsite microgrid solutions for the airport industry. The collaboration agreement addresses emissions reduction and aligns with the global industry's goal to focus on zero-emission buildings, horizontal airport infrastructure, vehicles, and aircraft systems.
On July 13, XOM announced it had solidified an agreement to acquire Denbury Inc. (DEN), an experienced developer of carbon capture, utilization, and storage (CCS) solutions and enhanced oil recovery. The all-stock transaction is valued at $4.9 billion, or $89.45 per share. The transaction synergies are expected to fortify XOM's growth and return trajectory.
Recent Financial Results
BKR’s revenue increased 25.1% year-over-year to $6.32 billion in the fiscal second quarter that ended June 30, 2023. Its operating income stood at $514 million, compared to an operating loss of $25 million in the year-ago quarter.
Adjusted net income (non-GAAP) and adjusted EPS (non-GAAP) stood at $395 million and $0.39 per share, representing 246.5% and 254.5% improvements year-over-year. Also, the company’s adjusted EBITDA increased 39.3% year-over-year to $907 million. Its free cash flow (non-GAAP) stood at $623 million, up 323.8% year-over-year.
For the fiscal second quarter that ended June 30, 2023, XOM’s total revenues and other income stood at $82.91 billion, down 28.3% year-over-year. Net income attributable to XOM and earnings per common share declined 55.6% and 53.9% from the year-ago values to $7.88 billion and $1.94, respectively.
For the six months that ended June 30, 2023, XOM’s cash and cash equivalents increased 56.7% year-over-year to $29.56 billion. 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.
Past and Expected Financial Performance
BKR’s revenue has grown at 1.3% and 1.1% CAGRs over the past three and five years, while XOM’s revenue has grown at 19.8% and 7.1% CAGRs over the same periods, respectively. However, BKR’s tangible book value grew 71.9% over the past three years, while XOM’s grew at 3.4%.
For the fiscal years ending December 2023 and December 2024, BKR’s revenue is expected to increase 20.2% and 9.9% year-over-year to $25.44 billion and $27.94 billion, respectively. For the fiscal years 2023 and 2024, Street expects its EPS to come at $1.53 and $2.02, up 70.5% and 32% year-over-year, respectively.
Furthermore, BKR’s revenue and EPS for the fiscal third quarter ending September 2023 are expected to come at $6.52 billion and $0.40, up 21.5% and 52% year-over-year, respectively. The company surpassed EPS estimates in three of the trailing four quarters, which is impressive.
XOM’s revenue for the fiscal year ending December 2023 and December 2024 is expected to decline 15.9% and 1.1% year-over-year to $347.91 billion and $344.15 billion, while its EPS is expected to decline 35.1% and 3.2% year-over-year to $9.12 and $8.83, respectively.
For the fiscal third quarter ending September 2023, XOM’s revenue and EPS are expected to decline 23.1% and 51.4% year-over-year to $86.15 billion and $2.16, respectively. However, XOM surpassed consensus EPS estimates in three of the trailing four quarters.
Profitability
BKR’s trailing-12-month levered FCF margin is 8.46% compared to XOM’s 9.48%. Also, BKR’s CAPEX/Sales of 4.64% compared to XOM’s 5.82%. Moreover, BKR’s 0.67x asset turnover ratio compares with XOM’s 1.01x.
Valuation
In terms of forward non-GAAP PEG, BKR is currently trading at 0.41x, 93.2% lower than XOM, which is trading at 6.02x.
POWR Ratings
BKR has an overall rating of B, which equates to a Buy in our POWR Ratings system. On the other hand, XOM has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. BKR’s Sentiment grade of B is in sync with favorable analyst estimates, while XOM’s Sentiment grade of D is evident from its poor analyst estimates.
Furthermore, BKR has an A grade for Growth, in sync with its robust financials. Conversely, XOM’s D grade for Growth is justified by its widening losses.
Within the Energy - Oil & Gas industry, BKR is ranked #11, while XOM is ranked #45 out of 87 stocks.
Beyond what we’ve stated above, we have also rated both stocks for Value, Momentum, Stability, and Quality. Click here to view BKR ratings. Get all XOM ratings here.
The Winner
The energy sector is projected to stay resilient, buoyed by robust demand for oil and gas. This surge in demand offers appealing opportunities for industry participants BKR and XOM.
However, given BKR’s strong profitability scenario, robust financials, and promising bottom-line estimates, it could be a better choice now.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy or Buy. View all the top-rated stocks in the Energy - Oil & Gas industry here.
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XOM shares were trading at $111.33 per share on Thursday afternoon, up $0.45 (+0.41%). Year-to-date, XOM has gained 3.43%, versus a 19.06% 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.
Exxon Mobil (XOM) vs. Baker Hughes (BKR): Which Energy Stock Is the Better Buy for September? StockNews.com
