Energy Stocks Rise as Stock Market Crashes: Should You Buy These 2 Stocks?
Overall, stock market performance has been pretty abysmal over the past two months. However, one industry largely outperformed the others: energy. Since early 2022, sector monitoring S&P 500 Energy the index is up an incredible 47% compared to the index S&P500down nearly 18%. It’s rare to see this kind of outperformance in an industry, and especially remarkable in a sector that has performed so poorly over the past decade. Even with its recent gains, the S&P 500 Energy Index is up less than 30% over the past 10 years.
Given all of this, some investors may be wondering if energy stocks still have the potential to outperform from here. While the longevity of the fossil fuel industry is questionable, oil will remain a key energy source for at least the next decade. here’s why ExxonMobil (XOM 0.79%) and western oil (OXY -1.09%) benefit from this request.
ExxonMobil is the largest US-based oil and gas company by market capitalization. Like most oil and gas giants, it operates largely in the upstream and downstream segments of the petroleum industry – both exploration and extraction of fossil fuels and the manufacture of various chemicals. and petroleum-based with them.
As economies around the world have reopened, demand for oil and gas has increased, but for a host of reasons supplies have remained tight. As a result, ExxonMobil’s financial results have been fantastic. It posted first-quarter sales of $87.7 billion, up 52% year-over-year. Despite producing fewer barrels per day in oil equivalent, ExxonMobil saw a 76% increase in profits from its upstream operations. Overall, earnings were up 101% over the prior year period, generating nearly $14 billion in cash flow.
As management brought the company’s debt ratio back into its target range of 20% to 25%, it decided to use this cash flow to repurchase shares. With approval to repurchase up to $30 billion in stock through 2023, ExxonMobil will reduce its number of outstanding shares by approximately 8%. At the current share price, its dividend yields around 4%.
However, ExxonMobil trades at around 15 times earnings, which is at the high end of its valuation range over the past 15 years. Investors should therefore be careful before opening a new position in this security, as it could return to a level at the lower end of its range.
Occidental focuses on the exploration and extraction of oil and natural gas, and also operates in the midstream segment, managing the pipelines between drilling sites and processing facilities. The company is also one of Warren Buffett’s largest holdings (2.8% of his investment portfolio, the seventh largest holding), as Berkshire Hathaway owns about 15% of Occidental’s stock and has warrants to buy even more, which would bring its stake to 22%.
So what does Buffett see in this case? First of all, Occidental Petroleum is incredibly profitable right now. Management has stressed that it needs West Texas Intermediate crude prices to stay at $40 a barrel to maintain its quarterly dividend, not its profitability. With crude averaging $94.29 per barrel in the first quarter, Occidental went from a net loss of $0.36 per share in the first quarter of 2021 to a profit of $4.65 per share in the first quarter of 2022. Overall, it produced $3.3 billion in free cash flow, which it immediately channeled into paying down debt.
Management has set a goal to reduce Occidental’s debt to less than $20 billion and is devoting a large portion of its cash flow to that end. Over the past year, the company has reduced its outstanding debt from $35.5 billion to $25.8 billion and, given current oil market developments, will likely be able to reach its objective by the end of the year.
After cleaning up the balance sheet, management will likely increase the dividend (which at current prices yields 0.8%, quite low for an oil and gas company) and buy back shares. These moves will reward shareholders over the long term, but what about the stock itself?
Despite many ups and downs, Occidental is still down nearly 40% from the all-time high it reached in 2010. Additionally, valuing Occidental is difficult, as it has spent several years in a unprofitable state as the market fluctuates around it. For this reason, I plan to avoid Occidental stocks.
Shares of ExxonMobil and Occidental could outperform the market over the next few months or even next year. However, I doubt either one can beat the market over a three to five year period.