Major Oil Stocks Showdown: 2 to Buy, 2 to Avoid

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If one were to simply look at the immediate data for the financial markets, they could be excused for assuming an optimistic perspective.

Major Oil Stocks Showdown: 2 to Buy, 2 to Avoid

On Tuesday, the S&P 500 index gained about 1% against the week’s opener, taking several major oil stocks — which have been mostly embattled since the second half of the year — along for a much-needed ride.

The Energy Select Sector SPDR (XLE) — an oil stocks exchange-traded fund covering a diverse range of leading and independent companies — jumped 2.5%.

The broad rally in the markets also comes at a very critical juncture. According to Bloomberg, the U.S. Federal Reserve is deliberating its widely expected decision to raise interest rates, something that has not happened since 2006.

Funds such as the Financials Select Sector SPDR (XLF) were especially buoyed due to the correlation between higher rates and profitability for financial services. However, a hawkish Fed would imply a stronger dollar, and thus, a hindrance to oil stocks and commoditized businesses.

That oil stocks instead responded positively is — at least in the nearer-term — a very good sign.

But make no mistake about it: the energy sector still has major hurdles to face. In light of the long-term decline in Brent crude oil — the international benchmark has lost around 70% of its value in the last two years — two major factors will likely contribute to further bearishness.

First, the decision by the Organization of the Petroleum Exporting Countries to not limit production will surely exacerbate the current oversupply, hampering profitability for oil stocks.

Second, an unusually warm winter in the U.S. has dampened demand for heating solutions.

More than ever, investors will need to rely on the fundamental strengths of individual companies to survive in this volatile sector. Here are two major oil stocks that are attractively priced — and two that should be avoided.

Oil Stocks to Buy: Exxon Mobil Corp. (XOM)

Oil Stocks to Buy: Exxon Mobil Corp. (XOM)

In a fairly dramatic reversal against its long-held stance, Exxon Mobil Corp. (XOM) took a conciliatory approach towards environmentalists, supporting the broad issues discussed at the recent United Nations Climate Change Conference in Paris, France.

Although critics are quick to argue that the latest move is nothing more than a publicity stunt, it does demonstrate that even the world’s biggest oil explorer is attuned to the rapidly shifting dynamics affecting oil stocks everywhere.

And what a change it has been! After dominating its competitors in the 2000s, XOM stock has lost some of its edge. In the past two years, XOM stock is down nearly 17%, while year-to-date, the company has struggled at 15%.

However, Exxon appears to have hit bottom a few months back in mid-August, with shares generally trending higher since then. The last five days have been particularly robust, as XOM stock added back nearly 4% of value in the markets.

XOM stock, technical analysis
Source: Source: JYE Financial, unless otherwise indicated

Fundamentally, the story is about making do with the resources available. True, the current decline in XOM stock’s revenue per share as compared to last year is worrisome at 36%. However, the downturn in net margin is less severe at 16%, allowing Exxon to meet Wall Street expectations for its earnings per share target most of the time since the beginning of fiscal year 2014.

It’s certainly not positioned in the most pleasant of circumstances, but XOM stock has the resources and management style to weather the storm and to return to its winning ways.

Oil Stocks to Buy: Chevron Corp. (CVX)

Oil Stocks to Buy: Chevron Corp. (CVX)

Times may be tough for oil stocks, but that’s certainly not stopping Chevron Corp. (CVX) from forging new ground.

Chevron, along with five other energy exploration firms, approved a $2 billion influx of cash to grow its joint gas development venture in Australia’s North West Shelf region. According to Bloomberg, the resource-rich area is responsible for producing over 33% of Australia’s oil and gas haul, while investment dollars funneling into the North West project total more than $34 billion.

Clearly, CVX stockholders see a future beyond the present volatility in the markets.

Nevertheless, it has been a rough 2015 for one of the preeminent names among major oil stocks. On a YTD basis, CVX stock is down more than 18% after failing to capitalize on early momentum.

On the other hand, if we push the time frame forward, CVX stock has been one of the best-performing investments. Since hitting bottom on Aug. 25, Chevron is up more than 30%, helped in part by strong trades over the past five days, bringing in more than 4%.

CVX stock, technical analysis
Source: Source: JYE Financial, unless otherwise indicated

On the fundamental side, CVX stock is understandably playing damage control given the massive collapse in energy since its highs.

The key difference against lesser companies is that Chevron happens to do a better job. Profitability margins — while far off the figures seen at the beginning of the decade — are substantially higher than the averages for the industry. Additionally, in CVX stock’s third quarter of fiscal year 2015 earnings report, it was disclosed that 11% of Chevron’s workforce would be eliminated.

Although cost-cutting is a touchy subject, management really has been put into a bind. But based on the broadly optimistic boost for CVX stock in the fourth quarter, the measures taken by Chevron should buy itself some time until a rebound in the underlying sector.

Oil Stocks to Sell: Royal Dutch Shell plc (RDS.A)

Oil Stocks to Sell: Royal Dutch Shell plc (RDS.A)

Will the $7 billion mistake made by Royal Dutch Shell plc (RDS.A) come back to haunt them?

After years of drilling for potential oil reserves in Arctic waters, Shell abruptly announced in late September a termination of all such efforts, citing a lack of economically viable energy resources. This sharply contrasted with earlier geological surveys that revealed a high probability of the existence of abundant oil deposits.

Even Shell’s aggressive pursuit in keeping its Arctic drilling rights is costing them money.

RDS.A stockholders have reason for alarm. The investment thrown into the Arctic venture represents about 22% of RDS.A stock’s on-hand cash. In and of itself, that’s a significant amount of change.

Factor in the 30%-plus loss in revenue per share trend against FY 2014’s result and we start to see that RDS.A stock can ill afford a continuation of these missteps.

Additionally, Shell’s profitability margins are fairly anemic against industry standards, so there’s little room for error moving forward.

RDS.A stock, technical analysis
Source: Source: JYE Financial, unless otherwise indicated

But the technical trend is the real drag for RDS.A stock. Shell is down more than 33% YTD, greatly exceeding the losses of many of its competitors. And perhaps most damning of all, when other oil stocks saw huge gains in the past five days, RDS.A stock is actually in the red by nearly 5%.

What Shell needs is the oil market to move higher — right here, right now. Unfortunately, that’s a gamble that may be too rich for most investors of RDS.A stock.

Oil Stocks to Sell: BP plc (BP)

Oil Stocks to Sell: BP plc (BP)

A familiar scene is once again brewing within troubled oil stocks.

Repsol SA (REPYY) — Spain’s biggest oil company — announced its intention to sell its 3.1% ownership stake in Tangguh LNG, a liquefied natural gas project located in Indonesia and owned by majority holder BP plc (BP).

The reason for Repsol’s proposed sale was debt management in light of its overall cost-cutting strategy. It’s also a lesson that BP stockholders should take to heart.

Long-term debt obligations for BP stock have jumped 58% since the end of FY 2010, limiting its financial flexibility. However, the real issue is its horrible profitability margins, which have driven earnings deep into negative territory a few times.

Furthermore, BP stock’s top line for the year is 41% below the prior year’s result, the worst revenue trend among the oil stocks featured in this article.

BP stock, technical analysis
Source: Source: JYE Financial, unless otherwise indicated

Against forward earnings, BP stock is considered somewhat undervalued. It would be a mistake, though, to read too much into Wall Street projections. The markets have had a dim view on BP stock, dropping it more than 19% YTD. Like RDS.A stock, BP has failed to take advantage of the recent momentum in the energy sector, where it is down more than 3% over the past five days.

BP stockholders would also need an imminent and robust recovery in energy markets to undo some of the damage done to its financial picture.

But the harsh reality is this: there are much better alternatives available.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2015/12/oil-stocks-xom-cvx-bp-rdsa/.

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