In this piece, I have evaluated two energy stocks, Phillips 66 (PSX) and Marathon Oil Corporation (MRO), to determine a better investment. I find PSX a better pick for the reasons explained throughout this article.
Despite the growing transition to renewable energy, oil and gas will continue to remain in demand due to the world’s rising energy demand. Geopolitical tensions in the Middle East, a resurgence of the Chinese economy, and production cuts by OPEC+ have supported oil prices this year.
Oil posted a second straight monthly gain as OPEC+ extended voluntary output cuts by 2.2 million bpd through the second quarter. Meanwhile, Russia surprised analysts by announcing an extra 417,000 bpd reduction in the second quarter. OPEC+’s decision aims to stabilize prices amid demand worries, resulting in lower production from the group, forecasted at 34.6 million bpd in Q2, down from earlier estimates.
OPEC remains optimistic about oil demand growth in 2024 and 2025, keeping its forecasts unchanged. OPEC predicts a 2.25 million bpd increase in world oil demand for 2024 and a 1.85 million bpd rise in 2025. Moreover, OPEC has further raised its economic growth forecast for this year. The group now sees world economic growth of 2.8% in 2024.
The Energy Information Administration (EIA) forecast for global oil markets indicates a tightening of supplies in the near term due to the extension of OPEC+ production cuts. This is expected to lead to a decrease in global oil inventories by 0.9 million bpd in the second quarter of 2024. Additionally, global oil demand is projected to grow by 1.4 million bpd in 2024 and 2025.
Furthermore, the expected interest rate cuts from the Federal Reserve this year are likely to drive up demand for commodities, notably crude oil. Meanwhile, tensions in the Middle East continue to persist as hopes of a ceasefire between Israel and Hamas have faded, and Israel continues to exchange fire with Hezbollah.
Recent attacks on commercial shipping by the Houthis in the Red Sea have not directly impacted production. Still, potential disruptions in the Middle East or production shutdowns could lead to a rise in crude oil prices.
Moreover, the Chinese economy is showing signs of recovery after setting a growth target of 5% for 2024. With Beijing committed to supporting economic growth, oil demand could rise in the nation, thereby positively impacting oil prices as China is the biggest importer of crude oil. China's strong economic growth has historically driven global demand for commodities, including oil.
China’s crude oil imports rose 5.1% in the first two months of the year. Rystad Energy’s analyst Lin Ye said, “China is expected to release more demand momentum in the later months of the year, with stronger diesel demand to materialize out of winter and stronger gasoline and jet fuel demand in the holidays and summer travel season.”
PSX expects to increase mid-cycle adjusted EBITDA by $4 billion to $14 billion by 2025 and also grow shareholder distributions. It also hopes to achieve $1.4 billion run-rate savings by the end of 2024. In Refining, the company is implementing 10 to 15 projects annually to increase market capture by 5% by 2025.
For the first quarter, PSX expects the global Olefins & Polyolefins utilization in the mid-90% and refining crude utilization in the low-90%. For the full year 2024, its refining turnaround expense is expected to be between $575 million and $625 million. It expects to return between $5 billion and $7 billion to shareholders this year.
Meanwhile, MRO announced a capital expenditure of between $1.9 billion and $2.1 billion for 2024. The company expects total oil production of 190,000 net bopd at the midpoint of its 2024 guidance range. It expects 5% to 10% fewer net wells to sales in 2024 to deliver flat year-over-year total oil production. Winter weather is expected to lower first-quarter production by nearly 4,000 net bopd.
Assuming $75 WTI, $250 Henry Hub, and $10 TTF, MRO expects its $2 billion capital program to deliver approximately $1.9 billion of free cash flow. The company expects to operate an average of nine rigs and four frac crews this year.
In terms of price performance, PSX is the clear winner. PSX’s stock has gained 21% over the past six months, compared to MRO’s 7.4% decline. In addition, PSX’s stock has gained 20.1% over the three months, compared to MRO’s 7.6%.
Here are the reasons I think PSX could perform better in the near term:
Recent Financial Results
For the fiscal fourth quarter that ended December 31, 2023, PSX’s total revenues and other income declined 5.3% year-over-year to $38.74 billion. However, its adjusted Midstream and Chemical earnings came in at $754 million and $106 million, up 11.9% and 103.8% over the prior-year quarter, respectively.
For the same quarter, its adjusted net income attributable to PSX and adjusted EPS decreased 28.3% and 22.8% from the year-ago value to $1.36 billion and $3.09, respectively. Also, its adjusted EBITDA declined 19.1% year-over-year to $2.69 billion.
On the other hand, MRO’s total revenue and other income for the fiscal fourth quarter ended December 31, 2023, declined 2.4% year-over-year to $1.69 billion. Its income from operations fell 30.5% from the year-ago value to $520 million. Also, the company’s adjusted net income came in at $406 million and $0.69 per share, down 27.9% and 21.6% over the prior-year quarter, respectively.
Expected Financial Performance
For fiscal 2024, PSX’s EPS and revenue are expected to decrease 14.3% and 8.3% year-over-year to $13.55 and $137.44 billion, respectively. Its EPS for fiscal 2025 is expected to increase 6.5% year-over-year to $14.43, while its revenue for fiscal 2025 is expected to decrease 1.7% year-over-year to $135.13 billion.
Analysts expect MRO’s EPS for fiscal 2024 is expected to increase 0.8% year-over-year to $2.59, while its revenue for fiscal 2024 is expected to decrease 2% year-over-year to $6.57 billion. Its EPS and revenue for fiscal 2025 are expected to increase 19.3% and 3.1% year-over-year to $3.09 and $6.77 billion, respectively.
Profitability
PSX’s trailing-12-month revenue is 22.85 times what MRO generates. However, MRO is more profitable, with an EBITDA margin and net income margin of 66.84% and 24.08%, compared to PSX’s 6.78% and 4.76%, respectively. Also, MRO’s trailing-12-month gross profit margin of 76.49% is higher than PSX’s 13.10%.
Valuation
In terms of the trailing-12-month Price/Sales, MRO’s 2.36x is 413% higher than PSX’s 0.46x. Likewise, MRO’s forward EV/Sales ratio of 3.02x is 403.3% higher than PSX’s 0.60x.
However, MRO’s forward EV/EBITDA of 4.52x is 43.5% lower than PSX’s 8x. Also, MRO’s trailing-12-month Price to Book of 1.29x is 39.2% lower than PSX’s 2.12x.
POWR Ratings
PSX has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, MRO has an overall rating of C, translating to a 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. PSX has a B grade for Momentum, while MRO has a C grade for Momentum.
PSX and MRO have a C grade for Value, which is in sync with their mixed valuation.
Of the 84 stocks in the Energy – Oil & Gas industry, PSX is ranked #8, while MRO is ranked #44 in the same industry.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Stability, Sentiment, and Quality. Get all the ratings of PSX here. Click here to view MRO’s ratings.
The Winner
Supply limitations stemming from OPEC+ production cuts and continued tensions in the Middle East contribute to the energy sector's positive outlook, as supply is expected to remain tight.
The highly anticipated rate cuts by the Federal Reserve this year are expected to boost economic activity, thereby increasing oil demand. Additionally, an expected revival of the Chinese economy will likely crude oil imports into the country. The confluence of tight supplies and rising demand bodes well for oil and gas companies like PSX and MRO.
Considering PSX’s robust financial position, optimistic full-year guidance, and solid momentum, it could be a better investment choice than MRO.
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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PSX shares were trading at $152.67 per share on Wednesday morning, up $2.30 (+1.53%). Year-to-date, PSX has gained 15.50%, versus a 8.70% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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