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Exxon, Chevron Could Have More Room to Run

Oil prices have more upside especially given the Bide Administration's stricter rules on drilling. Andy Hecht explains why investors should consider getting long Exxon Mobil (XOM) and Chevron (CVX).

  • A greener path to US energy production under the new administration

  • Handing the pricing power back to the cartel

  • XOM shares remain cheap and will move with the oil price

  •  

  • CVX has low debt and could continue to move higher

  • OIH may continue to lag the petroleum-sector

Sector rotation in energy shares began in late October. The shares in oil and gas companies have been the red-headed stepchildren of the stock market since they reached highs in mid-2014. The S&P 500 Energy Sector SPDR (XLE) reached its all-time high in June 2014 at $101.52 per share. The last time crude oil traded above the $100 per barrel level was in July 2014. The energy companies have underperformed crude oil over the past six and one-half years. At the end of last week, the energy commodity was trading at the $52.20 per barrel level, half the price as in July 2014. The XLE at $39.32 per share was far less than half the level at the 2014 peak. Meanwhile, the overall stock market moved to a record high, leaving the energy sector far behind.

Meanwhile, on October 29, the XLE hit its low of $26.98 and has recovered to over the $39 level at the end of January 2021. The bellwether for US energy stocks is 45.7% higher than the late October low as of January 29. The nearby NYMEX crude oil price rose from $33.64 on November 2 to the $52.20 level at the end of last week or 55% and the stock. While sector rotation has lifted energy-related shares over the past three months, they continue to lag the price of crude oil. However, the leading oil and gas stocks outperformed the S&P 500, which rose from 3,233.94 on October 30, 2020, to 3,714.24 at the end of January or 14.9% over the period. However, the stock market index nearly doubled in value from the low in June 2014 when it closed at 1,960.23.

Finding value in the stock market is challenging at all-time highs. Even after the recent sector rotation lifted energy shares, they remain at low levels compared to the rest of the stock market.

As we head into February, the leading oil and gas companies could have more upside potential, but oil services, a laggard within the sector, seems to be running out of upside steam. The trends in Exxon Mobile (XOM) and Chevron (CVX) remain higher as of the end of last week. However, the prospects for the leading oil services companies, including Schlumberger (SLB), Halliburton (HAL), and Baker Hughes (BKR), do not look as bullish. The VanEck Vectors Oil Services ETF product (OIH) has nearly a 40% exposure to the three services companies in its portfolio.

A greener path to US energy production under the new administration

The crude oil market has already gotten a taste of US energy policy under the Biden administration. One of the first moves was to cancel the Keystone XL project, a 1,179-mile pipeline running from the oil sands of Alberta, Canada, to Steele City, Nebraska, with a capacity of 830,000 barrels per day. While the pipeline carries mostly Canadian crude oil, it also transports US-produced petroleum. President Biden revoked the permit for the Keystone XL project on his first day in office.

A revocation is the first step in a far stricter regulatory environment for US oil and gas production. The greener path towards hydrocarbon output is likely to include a ban on fracking on federal lands, as well as a slew of other regulations for the industry. The move on the Keystone XL pipeline was only the first of many moves by the administration, which has the support of a majority in both houses of Congress.

Handing the pricing power back to the cartel

As US energy production declines because of increasing output costs and regulatory limitations, the pricing power for the energy commodity will pass back to the OPEC members and the cartel’s non-member leader Russia. Over the past years, Russian oil minister Alexander Novak, the mouthpiece for President Vladimir Putin, has likely used OPEC as a tool to expand influence in the Middle East. The cartel’s energy policy has been a function of cooperation with Russia.

For many decades, the US strived to achieve energy independence from Middle East sources. Over the past years, it reached that goal and became the world’s leading crude oil producer. In March 2020, daily output reached a record 13.1 million barrels per day, surpassing Russia and Saudi Arabia. While production remains at the 10.9 mbpd level in early 2021, the stricter regulatory environment is likely to cause it to decline. OPEC and Russia have one mission, to increase revenues and profits for members. They will use the US policy shift to take back the pricing power in the oil market, which could result in far higher prices as the demand for hydrocarbons increases in a post-COVID 19 world. While the long-term landscape for global oil demand will shift towards alternative energy sources, over the coming years, petroleum remains the commodity that powers the world. Gasoline and other oil product prices are likely to rise given the US shift away from production.

The leading US oil companies have multinational interests. Rising energy prices will likely support share prices. However, the sector remains an area of the stock market with a dark cloud hanging over the growth prospects unless they shift towards producing cleaner and alternative sources for powering the world.

XOM shares remain cheap and will move with the oil price

Exxon Mobile (XOM) shares reached the latest low on October 29 at $31.11, a far cry from the all-time peak of $104.76 in July 2014. At the height of the risk-off period in March 2020, the shares reached a low of $30.11. In August 2020, the Dow Jones Industrial Average removed XOM, replacing the company with Salesforce (CRM). Sector rotation in the stock market lifted XOM shares since the late October higher low.

Source: Barchart

As the chart highlights, XOM was trading at $44.84 at the end of last week. The first upside target stands at the June 2020 high of $55.36. However, ending the bearish technical trading pattern that has been in place since mid-2014 requires a move above the April 2019 high of $83.49. XOM has plenty of room for recovery.

2020 was a challenging year for all energy producers, and XOM is no exception.

Source: Yahoo Finance

As the chart shows, after beating consensus estimates with a 53 cents per share profit in Q1 2020, XOM posted a 70 cents loss in Q2 and an 18 cents loss in Q3. The company will report Q4 results on February 2, and the market expects EPS of only one penny. A survey of twenty-three analysts on Yahoo Finance has a price target of $50.78 for XOM, with projections ranging from $36.50 to $79.00 per share. Aside from interests in the US, the company also explores for and produces oil and gas in Canada and the Americas, Europe, African, Asia, and Oceania. While many analysts have warned that the dividend could fall or disappear, XOM was still paying shareholders $3.48 or around 7.76% at the end of last week.

Most of the leading Wall Street analysts rate the shares overweight or buy at the current level. At below $45 with the price of crude oil stable to rising, the dollar index in a bearish trend, and inflationary pressures rising, the potential for a far more substantial rebound is high.

CVX has low debt and could continue to move higher

Chevron Corporation (CVX) is the other leading US integrated multinational oil company. Like XOM, CVX shares reached an all-time peak in July 2014 at $135.10. The stock dropped to a low of $51.60 in March 2020 and recovered to just above the $85 level at the end of last week. Many investors have favored CVX over XOM because of its lower debt level.

Source: Barchart

The chart shows that the first upside target for CVX is at the June 2020 high of $103.59. The stock recovered from its most recent October 29 low of $65.16. There is considerable congestion between the $110 and $130 level in the stock. A move above that band is necessary for a bullish technical breakout. CVX has only reported a loss in one of the past four quarters.

Source: Yahoo Finance

The chart shows that CVX beat analyst estimates in three of the past four quarters, with the only loss of $1.59 per share coming in the challenging second quarter of 2020. The projections for Q4 2020 were for EPS of seven cents. CVX reported a one cent per share loss on Friday, January 29, which missed analyst estimates.

A survey of twenty-five analysts on Yahoo Finance has an average price target of $104.30 for the stock, with projections ranging from $90 to $116. The company pays a $5.16 per share or 6.06% dividend as of the end of last week.

Finding value in the stock market is more than a challenge these days. The current trends in XOM, CVX, and crude oil support higher prices for the shares. Moreover, rising inflationary pressures and the shift in US energy policy that strengthen OPEC+’s position are likely to push the shares of the leading US producers higher over the coming weeks and months.

OIH may continue to lag the petroleum-sector

Oil services have been the laggard within the energy sector for a lot longer than XOM and CVX have been in bearish trends. I use the VanEck Oil Services ETF product to monitor the trends in oil services. The top holdings of the ETF include:

Source: Yahoo Finance

The crème of the crop in oil services are Schlumberger (SLB), Halliburton (HAL), and Baker Hughes (BKR). OIH has 38.97% of its $723.42 million in net assets invested in the three companies. OIH charges a 0.35% expense ratio, but the ETF has a blended dividend yield of around 1.23%.

Oil services companies have been the worst-performing sector in the energy universe.

Source: Barchart

OIH is not a leveraged ETF product, but it suffered a reverse split in 2020 as the share prices in the services sector plunged. The all-time high came in 2008 when nearby NYMEX crude oil futures hit an all-time high of $147.27 per barrel, and exploration and drilling demand exploded. In 2008, OIH hit an all-time split-adjusted high of $1,525 per share. In March 2020, it fell to a low of $66 and recovered to the $162.59 level on January 29. The OIH made a higher low of $87.48 on October 29. After almost doubling over the past three months, this could be the perfect time to lighten up on long positions.

In a world that is turning towards alternative energy sources, the prospects for OIH are not looking all that bullish. From a technical perspective, the ETF has room to recover to the early 2020 high of $275.60. However, multinational leaders in production and exploration are likely to do better than oil services if oil prices continue to climb.

For those who had the foresight to buying oil-related equities in late October when they hit higher lows, scale-up profit-taking looks likely to be the optimal approach.

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XOM shares rose $1.03 (+2.29%) in premarket trading Tuesday. Year-to-date, XOM has gained 11.26%, versus a 1.55% rise in the benchmark S&P 500 index during the same period.



About the Author: Andrew Hecht

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles.

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