Russia’s invasion into Ukraine on Feb. 24 was a shock for the world. This crisis will have severe social, emotional, financial and investment-related risks, and this will be evident in the price of oil stocks.
Oil prices have historically been volatile. This trend was apparent amid the coronavirus pandemic as we saw oil futures turning negative. Oil prices have spiked in 2022 because of strong demand, supply shortages and most recently because of the uncertainty in Ukraine.
Russia is among the top oil-producing countries and the sanctions on Russian oil and gas exports in the form of banning the Russian financial system from the SWIFT messaging network could lead to further oil prices surge, which could translate into significant action in oil stocks.
Determining whether you should buy oil stocks requires examining all possible scenarios. Even though we could see another oil price spike, that could be short-lived for three main reasons. First, the global markets face high inflationary pressures because of soaring energy prices. A solution should address these pressures. An agreement with Iran to provide oil to global markets could be an effective solution to lower oil prices. Second, the Organization of the Petroleum Exporting Countries (OPEC) and allies will face further pressure to raise the monthly output of barrels per day. Third, oil is a commodity and is subject to seasonality. Spring has arrived, and warmer climate conditions should drive global oil demand lower at least as a way of heating.
According to the U.S. Energy Information Administration (EIA), global oil prices should fall later in 2022: “Our expectation of falling oil prices, particularly beyond [the first half of 2022], is contingent on our forecast of oil production and inventory growth.”
The main argument in favor of buying oil stocks today is not just the current conflict in Ukraine or the imbalance in the supply of and demand for oil. There are oil stocks that offer attractive dividend yields that generate passive income. These oil companies that have strong balance sheets and growth opportunities.
Forget the short-term risks and focus on the long-term prospects of the oil industry. Even if oil prices trend lower, a combination of share buybacks and strong dividend yield makes the following oil stocks interesting and attractive from a valuation perspective:
Oil Stocks: Exxon Mobil (XOM)
Exxon Mobil reported a sales growth of 55% in 2021 to $277 billion, and its shares have gains of nearly 30% year-to-date. Still, with a trailing twelve months (TTM) price-to-earnings (P/E) ratio of 14.8, the stock is attractive.
The forward dividend and yield of $3.52 and 4.5% respectively makes XOM stock desirable. Additional good news is a return to positive earnings per share. In 2020, Exxon Mobil reported an EPS loss of $5.25, and 2021 brought EPS of $5.39. EPS is expected to grow 14.94% in the next three to five years.
After two consecutive years of decreased free cash flow in 2019 and 2020, Exxon Mobil Corporation reported a free cash flow of $36.1 billion versus a loss of $2.6 billion in 2020. The PEG (P/E over growth) ratio of 0.76 supports a relatively undervalued stock. With a 52-week range of $52.10 – $83.08, XOM stock’s March 1 opening price of $78.77 is just 5% off the 52-week high.
Chevron (CVX)
Shares of Chevron have rallied nearly 27% in 2022 and approximately 40% in the past year.
A PEG ratio of 1.55 isn’t the most impress at first glance, but expected EPS growth of 8.31% is attractive.
CVX stock has a 52-week range of $92.86 – $149.95. That high is an all-time high reached on March 1. Momentum investors will like the fact that a new 52-week range was just made. Contrarian investors may consider it too risky to invest in the stock now. Despite the rally in 2022, the TTM P/E ratio of 18.1 is not excessive, and the forward dividend and yield of $5.68 and 4.05% respectively are positive factors for income-oriented investors.
Revenue growth of 65% in 2021 to $155.6 billion was impressive. Net income grew from a loss of $5.5 billion in 2020 to a gain of $15.63 billion. Diluted EPS increased from 9 cents in 2020 to $8.14. Finally, free cash flow increased from $1.7 billion to $21.1 billion in 2021.
Oil Stocks: Shell (SHEL)
The pattern held by the previous two oil stocks has mostly repeated for shares of Shell. SHEL stock has gains of nearly 16% year-to-date and 26% in the last year. Revenue growth of 43% in 2021 was impressive.
More impressive was the surge in net income from a loss of nearly $22 billion to a gain of $20 billion and EPS of $5.18 versus a loss per share of $5.56 the prior year. Free cash flow growth was not bad either; the oil company reported a positive free cash flow of $26 billion in 2021, a growth of 49%.
The TTM P/E ratio of 10 is very low, and the forward dividend and yield of $1.64 and 3.13% respectively can offer a safety margin in the event of any selloff.
Analysts give SHEL stock a 1-year target estimate of $64.11, implying 25% upside potential.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
