Oil and gas giants Chevron Corporation (CVX) and Exxon Mobil Corporation (XOM) are scheduled to report their fourth-quarter results on February 2, 2024. Both companies are expected to report a year-over-year decline in revenue and earnings for the fourth quarter.
In this article, I have discussed why waiting for a better entry point in CVX and XOM could be prudent.
For the fourth quarter, CVX’s EPS and revenue are expected to decline 21.4% and 5.8% year-over-year to $3.22 and $53.20 billion, respectively. Similarly, XOM’s EPS and revenue for the quarter are expected to decline 34.9% and 6.9% year-over-year to $2.21 and $88.82 billion, respectively.
Crude oil prices have remained range-bound since hitting $91 per barrel on October 9 due to concerns over supply outstripping demand, a slowdown in global economic growth, and a lack of demand from the top oil importer, China. In order to shore up sagging crude oil prices, OPEC+ has voluntarily cut oil production by 2.2 million bpd for the first quarter of 2024.
These fresh cuts are on top of the previously announced production cuts after late 2022, bringing the total pledged cuts to 5.86 million bpd. Crude oil prices have been unable to rise courtesy of the higher output by non-OPEC+ nations. The United States has been a significant contributor to this surge in crude oil supply by non-OPEC+, with the country reporting production of 13.248 million barrels per day (bpd) in October last year.
Moreover, the outlook for U.S. oil output in 2024 remains solid, with forecasts pointing toward a new production record of 13.2 million bpd and then rising to more than 13.4 million bpd in 2025. Similarly, U.S. dry natural gas production of 105 Bcf/d in 2024 and 106 Bcf/d in 2025 would both be records.
Despite the current downtrend in crude oil and natural gas prices, there exists the possibility of prices recovering as China announces measures to boost its economic growth. Moreover, the current conflict in the Middle East could flare up anytime, causing oil prices to move up. The IEA has forecast that global oil demand will rise by 1.2 million barrels per day this year compared to 2023, raising its outlook for the third consecutive month.
It expects world oil demand to grow by 1.8 million barrels per day in 2025, driven by global economic growth and solid activity in China. Similarly, OPEC, in its January Monthly Oil Market Report, said it expects oil demand to rise by 2.25 bpd this year and 1.8 million bpd next year.
Meanwhile, HSBC Global Research has predicted that the spare production capacity of OPEC+ will be enough to offset the current geopolitical risks, thereby keeping crude oil prices range-bound between $75 and $85 per barrel in the medium term. Moreover, uncertainty exists over how China intends to restock its refineries. China’s restocking of its refineries is likely to be moderate this year.
Given the overall uncertainty around the industry’s long-term prospects, let’s examine the fundamentals of the two stocks from the Energy – Oil & Gas industry, starting with the one ranked lower from the investment point of view.
Stock #2: Chevron Corporation (CVX)
CVX engages in integrated energy and chemical operations. The company operates in two segments: Upstream and Downstream.
On October 23, 2023, CVX announced its entry into an agreement with Hess Corporation (HES). The acquisition upgrades and diversifies CVX’s portfolio. The Stabroek block in Guyana is expected to grow production, and Hess’ Bakken assets will add another U.S. shale position to CVX’s DJ and Permian basin operations.
On August 7, 2023, CVX announced its acquisition of PDC Energy, Inc. The acquisition includes assets of 275,000 net acres in the Denver-Julesburg (DJ) Basin adjacent to CVX’s existing operations, adding more than 1 billion barrels of oil equivalent proved reserves and 25,000 net acres in the Permian Basin held by production.
In terms of the trailing-12-month Return on Total Assets, CVX’s 9.65% is 34% higher than the 7.20% industry average. Likewise, its 0.77x trailing-12-month asset turnover ratio is 40.1% higher than the industry average of 0.55x. Furthermore, the stock’s 9% trailing-12-month levered FCF margin is 51% higher than the industry average of 5.96%.
On the other hand, CVX’s 22.66% trailing-12-month EBITDA margin is 36% lower than the 35.42% industry average. Likewise, its 7.55% trailing-12-month Capex/Sales is 44.7% higher than the industry average of 13.66%.
For the fiscal third quarter, which ended September 30, 2023, CVX’s total revenues and other income declined 18.9% year-over-year to $54.08 billion. Its total adjusted earnings fell 47% over the prior-year quarter to $5.72 billion. Its adjusted EPS came in at $3.05, representing a decline of 45.1% year-over-year. On the other hand, its total costs and other deductions declined 12.5% year-over-year to $45.34 billion.
Analysts expect CVX’s EPS for the quarter ending March 31, 2024, to decline 14.6% year-over-year to $3.03. Its revenue for the quarter ending June 30, 2024, is expected to increase 5.2% year-over-year to $51.42 billion. Over the past three months, the stock has gained 3.3% to close the last trading session at $149.08.
CVX’s bleak prospects are reflected in its POWR Ratings. It has an overall rating of C, translating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has a C grade for Growth, Momentum, and Stability. It is ranked #59 out of 82 stocks in the Energy – Oil & Gas industry. To see the other ratings of CVX for Value, Sentiment, and Quality, click here.
Stock #1: Exxon Mobil Corporation (XOM)
XOM engages in the exploration and production of crude oil and natural gas. It operates through Upstream, Energy, Chemical, and Specialty Products segments. The company is involved in manufacturing, trade, transporting, and selling crude oil, natural gas, petroleum products, petrochemicals, and other specialty products and pursuing lower-emission business opportunities, including carbon capture and storage.
On November 13, 2023, XOM announced that it had planned to become a producer of lithium, with work beginning for the company’s first phase of North American lithium production in southwest Arkansas. XOM’s Low Carbon Solutions President Dan Ammann said, “Lithium is essential to the energy transition, and ExxonMobil has a leading role to play in paying the way for electrification.”
“This landmark project applies decades of ExxonMobil expertise to unlock vast supplies of North American lithium with far fewer environmental impacts than traditional mining operations,” he added.
On November 2, 2023, XOM announced that it had closed the acquisition of Denbury Inc. (DEN). DEN’s Chairman and CEO, Darren Woods, said, “This transaction is a major step forward in the profitable growth of our Low Carbon Solutions business.”
“Our expertise, combined with Denbury’s talent and CO2 pipeline network, expands our low-carbon leadership and best positions us to meet the decarbonization needs of industrial customers while also reducing emissions in our own operations,” he added. XOM now has the largest owned and operated CO2 pipeline network in the U.S., with access to more than 15 strategically located onshore CO2 storage sites.
On October 11, 2023, XOM and Pioneer Natural Resources jointly announced a definitive agreement for XOM to acquire Pioneer. The merger would transform XOM’s upstream portfolio by more than doubling the company’s Permian footprint and creating the industry-leading high-quality undeveloped U.S. unconventional inventory position.
XOM’s Chairman and CEO Darren Woods said, “Pioneer is a clear leader in the Permian with a unique asset base and people with deep industry knowledge. The combined capabilities of our two companies will provide long-term value creation well in excess of what either company is capable of doing on a standalone basis.”
On July 13, 2023, XOM announced an agreement to acquire Denbury Inc. XOM’s Chairman and CEO Darren Woods said, “Acquiring Denbury reflects our determination to profitably grow our Low Carbon Solutions business by serving a range of hard-to-decarbonize industries with a comprehensive carbon capture and sequestration offering.”
“The breadth of Denbury’s network, when added to ExxonMobil’s decades of experience and capabilities in carbon capture, utilization and storage (CCS), gives us the opportunity to play an even greater role in a thoughtful energy transition as we continue to deliver on our commitment to provide the world with the vital energy and products it needs,” he added.
In terms of the trailing-12-month Return on Total Capital, XOM’s 13.53% is 45.3% higher than the 9.31% industry average. Likewise, its 21.32% trailing-12-month Return on Common Equity is 8.9% higher than the industry average of 19.59%. Furthermore, the stock’s 0.94x trailing-12-month asset turnover ratio is 70.8% higher than the industry average of 0.55x.
On the other hand, XOM’s 33.87% trailing-12-month gross profit margin is 27.4% lower than the 46.62% industry average. Likewise, its 11.74% trailing-12-month net income margin is 8.8% lower than the 12.87% industry average. Furthermore, the stock’s 6.13% trailing-12-month Capex/Sales is 55.1% lower than the industry average of 13.66%.
XOM’s total revenues and other income for the third quarter ended September 30, 2023, declined 19% year-over-year to $90.76 billion. Its non-GAAP earnings, excluding identified items, decreased 51.2% over the prior-year quarter to $9.12 billion. Also, its non-GAAP earnings, excluding identified items per common share, stood at $2.27, representing a decline of 49% year-over-year.
On the other hand, its total costs and other deductions declined 11.1% year-over-year to $77.06 billion.
Street expects XOM’s EPS for the quarter ending March 31, 2024, to decline 29.2% year-over-year to $2. Its revenue for the quarter ending June 30, 2024, to increase 3.3% year-over-year to $85.68 billion. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past month, the stock has gained 3.2% to close the last trading session at $103.13.
XOM’s POWR Ratings are consistent with this uncertain outlook. It has an overall rating of C, translating to Neutral in our proprietary rating system.
It has a C grade for Momentum, Stability, and Sentiment. Within the same industry, it is ranked #46. Click here to see the other ratings of XOM for Growth, Value, and Quality.
What To Do Next?
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XOM shares were trading at $103.02 per share on Tuesday morning, down $0.11 (-0.11%). Year-to-date, XOM has gained 3.04%, versus a 3.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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