Exxon and Chevron ready to rise: the market is open to large oil companies

As uncertain as the outlook for oil prices is, the floor has been in place for over a year and is unlikely to be breached. Persistent demand and OPEC help support the price, while increased production drives profits Exxon Mobile NYSE:XOM AND Chevron New York Stock Exchange: CVX.

Fourth quarter results suggest that profits, cash flow and capital returns will continue to grow in 2024 and 2025.

Assuming the FOMC cuts rates this year and a recession does not occur, there is a high chance that economic activity will accelerate in the second half of the year and improve the already strong outlook.

The only difference between the two is that Exxon is the better buy. Simply put, it is twice the size of Chevron and has better operations and superior capital returns, although Chevron is working hard to catch up.

Revenue is lower, but operational quality is improving

Exxon and Chevron reported double-digit drops in revenue that missed analyst consensus, but that’s about as bad as the news gets for these energy companies. Revenues were impacted by one-off events and write-downs that are not expected to recur and which had minimal impact on profits. Each reports favorable production, volume and mix data, providing leverage today and an opportunity for accelerated earnings growth if and when oil prices rebound.

Margin news is favorable for these companies. Their margins have declined year-over-year (YoY) due to deleveraging oil prices, but have increased sequentially. Sequential gains were driven by operational and capital improvements that include the divestment of underperforming businesses for growth and green initiatives.

The critical detail of the ratios is cash flow. The increased volume is offsetting the revenue decline to some extent and allows for significant cash flow. The cash flow allows for debt reduction, dividends and share repurchases, which more than double the effective return, and the returns are substantial. The larger and better positioned Exxon generated total returns of $32.4 billion versus Chevron’s $26.3, both setting records. Exxon lowered its shares by 3.6% and Chevron by 3%.

Analysts see value and returns in the energy sector

Exxon and Chevron offer value trading at 12 times this year and 11 times next year’s earnings, paying 3.7% and 4.3% in dividend yield, respectively. The value is aggravated by analyst sentiment, which remains stable.

Analysts rate both as a “Moderate Buy” with a consensus price target of 20% to 25% above the current stock. The difference is that Exxon’s consensus price target is up from last year and relatively stable compared to a downside target for Chevron. Exxon is also well below analysts’ minimum target, suggesting deep value. Chevron is trading at analysts’ lowest target.

The technical outlook for Exxon and Chevron is nearly identical. Both peaked in tandem with or shortly after the peak of oil prices in 2022 and have since retreated to their trough level. The floor has been in place for over a year and appears to be a solid support. Because these stocks trade at or below analysts’ lowest price target, they are unlikely to fall below support levels without a change in the fundamental outlook for production, sales volume, or oil prices.

However, the Federal Reserve (Fed) is pointing to a longer hike scenario in which the first cuts come later than the market is pricing in and the likelihood of recession increases. Predicted odds from U.S. Treasury bond spreads reported by the Federal Reserve Bank of New York are trending at their highest levels since 1983 and are rising in the near term, with a significant increase in the past month.

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