Geopolitical interference and strategic supply adjustments could escalate oil prices shortly. So, investing in the stable energy stock Energy Transfer LP (ET) might be wise to benefit from the present sector situation. However, investors might want to wait before they dive into Exxon Mobil Corporation (XOM), as its fundamentals don’t look so strong as of now.
Before delving into the featured stocks, let's examine the industry dynamics.
In the past few months, Ukraine sporadically targeted Russia's refineries with drone attacks. The actions have rendered approximately 7% of Russia's refinery capacity inoperative. Most recently, an attack transpired at the Slavyansk refinery in Krasnodar. Other targets include Ryazan, Novoshakhtinsk, Norsi, Kirishi, Syzran, and Kaluga.
Since January 18, thirteen instances of aggression towards the Slavyansk refinery have occurred. While not all attempts were successful, there is a growing trend of Ukraine deliberately striking at Russian oil facilities, adding to the already heightened risk premiums due to geopolitical turmoil in the Middle East.
J.P. Morgan reported that the attacks have resulted in a shutdown of 900K barrels of Russia's refinery capacity and could introduce an inflationary factor of $4/bbl to the cost of oil.
As a result of Ukraine's attacks on Russian refineries and disruptions in oil transportation through the Red Sea, the oil market is expected to tighten in the second and third quarters. StoneX’s energy analyst Alex Hodes projects these assaults could reduce global petroleum supplies by approximately 350K bbl/day and increase oil prices by $3/bbl.
On top of the problems between Ukraine and Russia, it has become more difficult for Israel and Hamas to fix their relationship because Israeli Prime Minister Benjamin Netanyahu plans to attack Rafah even though his allies are advising against this action. This could further impact the oil prices.
That being said, Morgan Stanley has increased its predictions for the cost of Brent crude oil. The bank now thinks that prices will go up to $85 for a barrel in the first three months of the year, then $87.5 during the second quarter, and back to $85 in the fiscal fourth quarter.
Tailwinds from the oil market should benefit XOM and ET. In terms of price performance, XOM has climbed 8.2% over the past month, while ET gained 5% during the same period. However, XOM declined 1.1% over the past six months, closing the last trading session at $113.49, whereas ET surged 13.7% during the same period, closing the last trading session at $15.59.
But which energy stock could be a better pick? Let's find out.
Latest Developments
Recently, it was reported that CalPERS, a well-known public pension fund in America, has announced its plan to encourage XOM to settle a dispute with its shareholders, who are urging quicker measures to lower emissions of greenhouse gases.
XOM’s continuing legal issues can make people question its dedication to caring for the environment. Such bad press could lead to investors losing confidence and create obstacles for the company in growing its business.
On the other hand, in its fiscal 2023 fourth-quarter report, ET announced adjusted EBITDA to range between $14.5 billion and $14.8 billion for fiscal year 2024. This shows a hopeful perspective with an important rise of 7% from last year's $13.7 billion. Thus, it surpasses expectations by precisely $100 million.
The company's expected growth looks good for the future. This will likely make investors more confident and highlight its ability to take advantage of market opportunities.
Recent Financial Results
In the fourth quarter of fiscal 2023, which ended December 31, 2023, XOM’s total revenues and other income decreased 11.6% year-over-year to $84.34 billion. Moreover, net income attributable to XOM and EPS declined 40.2% and 38.2% from the prior year’s period to $7.63 billion and $1.91, respectively.
However, as of December 31, 2023, the company’s cash and cash equivalents amounted to $31.54 billion, up from $29.64 billion as of December 31, 2022.
During the fourth quarter of fiscal 2023, which ended December 31, 2023, ET’s revenues marginally rose year-over-year to $20.53 billion. Net income attributable to partners and net income per unit grew 14.9% and 8.8% from the prior year’s period to $1.33 billion and $0.37, respectively.
Moreover, as of December 31, 2023, ET’s current assets stood at $12.43 billion, up from $12.08 billion as of December 31, 2022.
Past and Expected Financial Performance
Over the past three years, XOM’s revenue and EBITDA increased at 23.5% and 58.4% CAGR, respectively. Moreover, the company’s tangible book value rose at a CAGR of 9.2% over the same time frame.
For the fiscal year ending December 2024, analysts expect the company’s revenue to decline 1.1% year-over-year to $340.72 billion. Likewise, its EPS for the ongoing year is expected to decrease 8% from the previous year to $8.76.
Over the past three years, ET’s revenue and EBITDA rose at a CAGR of 26.4% and 10%, respectively. In addition, the company’s earnings from continuing operations increased at a 235.7% CAGR. Furthermore, its tangible book value grew at a CAGR of 24.3% during the same period.
The consensus revenue estimate of $87.26 billion for the fiscal year ending December 2024 reflects an 11% year-over-year increase. The company’s EPS for the same period is expected to grow 40.9% from the prior year to $1.54.
Profitability
XOM’s trailing-12-month revenue is 4.3 times that of what ET generates. Moreover, XOM is more profitable, with a trailing-12-month gross profit margin of 32.83% compared to ET’s 17.56%. Similarly, XOM’s trailing-12-month EBITDA margin of 20% compares with ET’s 16.15%. Also, XOM’s trailing-12-month net income margin of 10.64% compares with ET’s 5%.
Valuation
In terms of trailing-12-month Price/Sales, ET is trading at 0.63x, 53.3% lower than XOM’s 1.35x. Moreover, ET’s trailing-12-month Price to Book ratio of 1.74x is 20.5% lower than XOM’s 2.19x. Furthermore, ET’s trailing-12-month Price/Cash Flow of 5.52x compare with XOM’s 8.10x.
Thus, ET is more affordable.
POWR Ratings
XOM has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. Conversely, ET has an overall rating of B, translating to Buy. 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. XOM has a D grade for Value, which syncs with its stretched valuation. Regarding forward non-GAAP P/E, the stock is trading at 12.81x, 14.5% higher than the industry average of 11.19x. Moreover, its forward Price/Cash flow of 8.33x is 56% higher than the 5.34x industry average.
On the other hand, ET has a B grade for Value, corresponding to its lower-than-industry valuation. In terms of forward non-GAAP P/E and forward Price/Cash flow, the stock is trading at 10.04x and 4.23x, 10.3% and 20.7% lower than the industry averages of 11.19x and 5.34x, respectively.
Of the 83 stocks in the Energy - Oil & Gas industry, XOM is ranked #43, whereas, ET is ranked #7.
Beyond what we've stated above, we have also rated both stocks for Growth, Momentum, Stability, Sentiment, and Quality. Click here to view XOM ratings. Get all ET ratings here.
The Winner
Both XOM and ET could benefit from the current industry dynamics. However, ET's superior financial performance in its most recent quarter, optimistic analyst projections, discounted valuation, and robust growth prospects position it as a better buy than XOM.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. You can view all the top-rated stocks in the Energy - Oil & Gas industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
XOM shares rose $0.06 (+0.05%) in premarket trading Friday. Year-to-date, XOM has gained 14.57%, versus a 10.21% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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