It’s been an awesome 2022 for energy stocks, with the S&P 500 Energy index surging 63% so far this year amid soaring oil prices.
Bank of America analysts see oil rising a bit further, with the European (Brent) oil price hitting $100 next year, up from $95 recently.
“After a bellwether quarter for both XOM and CVX, we see both anchoring lower risk exposure to an evolving macro backdrop,” they said.
That backdrop is supported by “legacy industry underinvestment and our expectations that sustained OPEC+ intervention led by Saudi Arabia will support a [higher] oil price outlook,” the analysts said.
“We see the relative investment case for CVX and XOM diverging,” they said. Chevron will benefit from “legacy capital discipline and portfolio oil leverage.”
But momentum will swing toward Exxon, “as five years of countercyclical investment drives divergence in free cashflow,” the analysts said.
“While we see greater value with XOM, both names continue to offer low risk leverage to higher long term oil prices.”
Further, “with both stocks moving quickly toward zero net debt within the next year,” the analysts raised their share-price objective for Exxon to $136 from $123 and for Chevron to $190 from $180.
“We see a pending acceleration in free cashflow underpinning an extended period of relative out-performance for XOM, which remains our top U.S. oil major idea,” the analysts said.
Both companies have the balance-sheet capacity to increase cash returns, mainly through share buybacks, they said. “As things stand currently, the absolute scale of buybacks is the same for both at $15 billion,” they said.
Morningstar’s Take on Exxon
Morningstar analyst Allen Good assigns the company a narrow moat (competitive advantage). He puts fair value for the stock at $102, compared to a recent price of $111.
But that estimate assumes a Brent oil price of only $60 a barrel. Raise that to $75, and Good’s fair-value estimate for Exxon climbs to $126.
“While many of its peers have announced intentions to divert investment to renewables …, Exxon remains committed to oil and gas,” he wrote in a commentary. And that’s probably wise, he said.
Morningstar’s Take on Chevron
Good gives the company a narrow moat. He puts fair value for the stock at $149, compared to a recent price of $184.
But again that estimate assumes a Brent oil price of only $60 a barrel. Raise that to $75, and Good’s fair-value estimate for Chevron ascends to $193.
“We expect Chevron to deliver higher returns and margin expansion thanks to an oil-leveraged portfolio as well as the next phase of growth,” he wrote in a commentary. That phase is “focused on developing its large, advantaged Permian Basin position.”