I evaluated two energy stocks in this piece: Occidental Petroleum (OXY) and Exxon Mobil (XOM). A closer look suggests a neutral view for Occidental and a bullish view for Exxon.
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Occidental Petroleum is an explorer and producer of oil and natural gas, while Exxon Mobil is an explorer and distributor of oil, gas, and petroleum products. Shares of Occidental Petroleum have slipped 14% over the last three months and are off 13% year-to-date and 15% over the past 12 months. Meanwhile, Exxon Mobil stock has been up 4% over the last three months and has gained 19% year-to-date, although it has been up just 17% over the past year.
Importantly for both companies, oil and natural gas prices plunged on Monday, with Brent and WTI crude each off 6% and natural gas down 10%. Oil and natural gas prices tumbled after Israel avoided Iran’s refining facilities with its latest strike, and Iran gave a measured response to that strike. The possibility that tensions in the Middle East could cool is allowing other macro factors, like the weak outlook for Chinese demand, to return to weighing on oil and gas prices.
However, when macro factors are causing temporary headwinds in a sector, it can sometimes be a good time to look for buy-in-the-dip opportunities.
Occidental Petroleum (OXY)
At a price-to-earnings multiple of 12.4x and especially an Enterprise-Value-to-EBITDA (EV/EBITDA) ratio (commonly used for energy companies) of 6.2x, Occidental Petroleum might look like a steal, but there’s more to the story. High debt and falling earnings suggest some bumps in the road, and the company’s low dividend yield doesn’t offer a compelling reason to ride the trouble out. Thus, a neutral view looks appropriate at this time.
First, Warren Buffett’s Berkshire Hathaway ($BRK.A) ($BRK.B) may be holding off on buying more shares soon. The firm bought more than 7.2 million additional shares of Occidental Petroleum in the second quarter. However, the lack of regulatory filings since then suggests Berkshire Hathaway may have put its purchases of OXY stock on hold, at least temporarily.
Second, falling oil prices and earnings are especially big problems for Occidental with its high gross debt level, which Standard and Poor’s estimates at $25 billion at the end of the current quarter after asset sales and debt paydowns. As a result, the firm assigned a junk rating of BB+ to Occidental’s senior debt. The company had just $1.85 billion in cash and equivalents and $10.1 billion in total assets at the end of the June quarter.
Finally, Occidental’s low dividend yield of 1.7% (relative to the rest of its industry) just doesn’t make waiting around for these problems to be resolved worthwhile. However, the payout ratio of 23.88% suggests that the dividend is relatively safe.
Not all bad for Occidental
On the other hand, Occidental is trading at a P/E below the sector’s current average of 13.5x and a three-year average of 19.6x. These low multiples suggest the company could be a good long-term play. However, the issues described above keep me on the sidelines for now.
Additionally, Occidental is widely considered a leader in carbon-capture technology. However, this division could take time to really take off.
What Is the Price Target for OXY Stock?
Occidental Petroleum has a Hold consensus rating based on four Buys, 12 Holds, and one Sell rating over the last three months. At $64.93, the average Occidental Petroleum stock price target implies an upside potential of 29.65%.
Exxon Mobil (XOM)
At a P/E of 14.2x, Exxon Mobil is below the three-year average for the energy sector, suggesting the current headwinds are temporary. The company’s EV/ EBITDA multiple of 7.8x is on the high side relative to the past year, but its dividend yield and balance sheet are attractive enough to tip the scale into bullish territory.
First, investors like to see a fortress balance sheet with energy companies, which certainly applies to Exxon Mobil. At the end of the June quarter, the company had $26.5 billion in cash and cash equivalents. It also had total assets of $460.7 billion and total liabilities of $184.4 billion. Net debt stood at $16.7 billion. Exxon Mobil’s fortress balance sheet will enable it to endure a period of lower oil prices and earnings.
Further, Exxon Mobil’s dividend yield of 3.2% is solid and makes holding the stock during this bumpy period of low oil prices worthwhile, even though it’s a bit short of the sector’s average of 3.75%. The payout ratio of 42% also suggests the dividend payments are quite safe.
What Is the Price Target for XOM stock?
Exxon Mobil has a Moderate Buy consensus rating based on 11 Buys, five Holds, and zero Sell ratings assigned over the last three months. At $137.13, the average Exxon Mobil stock price target implies an upside potential of 16.93%.
Conclusion: Neutral on OXY, Bullish on XOM
Ultimately, Occidental Petroleum could become an excellent long-term play, but we just aren’t there yet. Further, looking at the company’s long-term share-price performance isn’t inspiring. The stock has slipped 17% over the last 10 years, although most of that decline has come year-to-date. On the other hand, Exxon Mobil shares have soared 93% over the last decade, indicating that this stock is one to buy and hold for the long term. With oil prices low, this is also a great time to buy Exxon Mobil stock because the shares should rise as those prices recover.
