- Chevron Corporation (CVX): A strong balance sheet and low-break even assets. Valuations seems stretched and investors can consider buying on dips.
- Exxon Mobil (XOM): Upstream segment remains the cash flow cow. Any decline in Brent below $100 per barrel will result in correction.
- Hess Corporation (HES): Annual free cash flow likely to increase to $3 billion by 2026. Break-even oil price higher as compared to Chevron and Exxon. Premium valuation justify some correction.
Oil and gas prices have surged in 2022 with geo-political risk premium being the biggest catalyst. While tensions between Russia and Ukraine remain high, the war premium is discounted in oil stocks.
There have been some big moves in oil stocks with Brent trading above $100 per barrel. For oil companies, it means EBITDA margin expansion and cash flow upside. Oil stocks have therefore discounted improvement in fundamentals, potentially higher dividends and flexibility to make some big investments.
Amidst the dominance of good news, investors need to remain cautiously optimistic. A key reason is run-away inflation and the impact of the war on the global economy. There are already predictions of a possible recession in 2023 with rate hike being another headwind for growth.
If there is a relative deceleration in global economic activity in the coming quarters, oil is likely to see some correction. Also, rate hike is likely to curb inflation to some extent. In an inflationary scenario, the energy sector tends to out-perform. However, if inflation is curbed, global liquidity tightening will impact oil price. It would also imply profit booking in oil stocks.
It’s worth mentioning here that a view to sell oil stocks does not imply any significant weakening in fundamentals. However, it makes sense to book profits and re-enter quality stocks at lower levels. Let’s discuss three oil stocks to sell as Q2 2022 kicks-off:
Oil Stocks: Chevron Corporation
Chevron (NYSE:CVX) stock has been surging higher with returns of 42% for year-to-date 2022. There is no doubt that the company has a strong balance sheet and a quality asset base.
However, the rally seems to be overdone in the near-term and a correction is imminent. Booking profits and re-entering at lower levels makes sense with Brent back to $100 per barrel.
Of course, Chevron has low break-even assets. The company generated positive operating cash flows even during the first year of the pandemic. An attractive break-even makes CVX stock among the top dividend stocks to consider.
Having said that, CVX stock currently trades at an EV/EBITDA of 9.7. The U.S. energy sector currently has an average EV/EBITDA of 7.5. Valuations are likely to move towards the industry average and this will imply some correction.
Coming back to the long-term perspective, Chevron has added 46bboe in resources in the last decade. With robust cash flows the company has flexibility to gradually increase production. Assets in low geo-political risk zone is an added advantage.
Overall, CVX stock is worth keeping in the investment radar. For now, fresh exposure can be avoided and profit booking makes sense.
Exxon Mobil (NYSE:XOM) has also been among the top performing oil and gas stocks in the current year. Similar to Chevron, XOM also offers investors a healthy dividend yield, which seems sustainable.
However, on the valuation front, there is a case for a near-term correction. XOM stock currently trades at an EV/EBITDA of 8.4 as compared to the sector average of 7.5. If crude corrects below $100 per barrel, the valuation gap is likely to be filled on the downside. I would therefore remain in the side-lines.
It’s worth noting that Exxon Mobil is diversified in the downstream and chemicals segment. However, the upstream segment remains the cash flow machine. For 2021, the upstream segment contributed to 68% of the total operating cash flows. Going forward, the company’s assets in Permian and Guyana are likely to deliver incremental cash flows.
In terms of long-term positives, the company has assets at a break-even of $41 per barrel. Further, a debt-to-capital ratio of 21% gives the company ample financial flexibility to invest in core assets and the renewable energy portfolio. Over the next five-years, the company plans $15 billion in lower-emission investments.
I would also avoid going long on Hess Corporation (NYSE:HES) at current levels. Further, positions can be trimmed down with a correction likely after a big rally. As a matter of fact, HES stock trades at an EV/EBITDA that’s higher than Chevron or Exxon.
Hess also has some low break-even assets. The company’s four sanctioned Guyana developments have a break-even price of $25 to $35 per barrel. Guyana assets are game changing for the company with visibility for multi-million barrels of remaining exploration upside. However, the company expects portfolio break-even at $45 per barrel by 2026. Even on this front, Chevron and Exxon look relatively attractive.
Of course, on a stand-alone basis, there a reason to be bullish on Hess. Between 2021 and 2026, the company anticipated cash flow to increase at a CAGR of 25%. By 2026, the company expects annual free cash flow of $3 billion. Given this visibility, dividend growth is likely in the next few years.
Overall, Hess Corporation has some attractive assets. The company’s credit metrics will improve in the next few years even if oil trades in the range of $70 to $80 per barrel. The only factor is grabbing the stocks at a lower EV/EBITDA valuation. I believe that the opportunity is likely to come in the next few quarters.
On the date of publication, Faisal Humayun did not hold (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.