A tight supply due to sanctions on Russia and soaring global demand from the lifting of lockdowns in China has kept oil and gas prices at high levels. While OPEC+ decided to hike output in July and August, the supply-demand imbalance is not expected to reduce anytime soon.
Investors’ interest in this space is evident from the FlexShares Morningstar Global Upstream Natural Resources Index Fund’s (GUNR) 4.8% gains over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) 0.1% returns. The global oil & gas upstream activities market is expected to grow at 9.5% CAGR to reach $5.66 trillion by 2026.
ConocoPhillips (COP) and Chevron Corporation (CVX) are two leading oil and gas companies engaged in exploration and production. COP explores, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas (LNG), and natural gas liquids worldwide. It primarily engages in the conventional and tight oil reservoirs, shale gas, heavy oil, LNG, oil sands, and other production operations. CVX provides administrative, financial, management, and technology support for companies engaged in integrated energy, chemicals, and petroleum operations worldwide. Operating in Upstream and Downstream business segments, the company produces and transports crude oil and natural gas.
Year-to-date, COP has rallied 63% and CVX has gained 50%. Which of these stocks is a better pick now? Let’s find out.
Latest Developments
On March 2, 2022, COP completed the sale of its subsidiary that indirectly owned its 54% interest in the Indonesia Corridor Block Production Sharing Contract (PSC) and a 35% shareholding in the Transasia Pipeline Company to MedcoEnergi for $1.36 billion. This disposition is part of its ongoing efforts to focus on low-cost supply opportunities.
On May 24, 2022, CVX’s Chevron U.S.A. Inc., through its Chevron New Energies division, oil and gas company Talos Energy Inc. (TALO), through its Talos Low Carbon Solutions division, and Carbonvert, Inc., a carbon capture and storage project development and finance company, announced the closing of the expanded joint venture to develop the Bayou Bend CCS offshore carbon capture and sequestration (CCS) hub. This partnership will focus on growing successful lower-carbon businesses.
Recent Financial Results
COP’s total revenues and other income for its fiscal 2022 first quarter ended March 31, 2022, increased 82.7% year-over-year to $19.29 billion. The company’s pre-tax income came in at $7.90 billion for the quarter, representing a 360.8% rise from the year-ago period. While its adjusted net earnings increased 375.5% year-over-year to $4.29 billion, its EPS grew 485.3% to $4.39. As of March 31, 2022, the company had $6.41 billion in cash and cash equivalents.
For the fiscal 2022 first quarter, ended March 31, 2022, CVX’s total revenues and other income increased 69.8% year-over-year to $54.37 billion. The company’s pre-tax income came in at $9.05 billion, representing a 315.9% rise from the prior-year period. CVX’s adjusted earnings came in at $6.54 billion, up 278.2% from the year-ago period. Its adjusted EPS came in at $3.36, indicating a 273.3% year-over-year improvement. As of March 31, 2022, the company had $11.67 billion in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, COP’s tangible book value and total assets have increased at CAGRs of 14.4% and 9.3%, respectively.
COP’s EPS is expected to increase 128.8% year-over-year in fiscal 2022, ending December 31, 2022, and decline 16.1% in fiscal 2023. Its revenue is expected to grow 51.6% in fiscal 2022 and decline 17.9% in fiscal 2022. Analysts expect the company’s EPS to rise at a 15.3% rate per annum over the next five years.
Over the past three years, CVX’s tangible book value and total assets have declined at CAGRs of 2% and 1%, respectively.
Analysts expect CVX’s EPS to grow 103.4% year-over-year in fiscal 2022, ending December 31, 2022, and decline 13.4% in fiscal 2023. Its revenue is expected to grow 33.6% year-over-year in fiscal 2022 and decline 3.8% in fiscal 2023. Analysts expect the company’s EPS to grow at a 17.8% rate per annum over the next five years.
Valuation
In terms of forward EV/EBITDA, CVX is currently trading at 5.87x, 33.1% higher than COP’s 4.41x. In terms of non-GAAP forward PEG, COP’s 0.66x compares with CVX’s 1.78x.
Profitability
CVX’s trailing-12-month revenue is 3.2 times COP’s. However, COP is more profitable, with a 46.4% EBITDA margin versus CVX’s 21.8%.
Furthermore, COP’s ROE, ROA, and ROTC of 27.8%, 13% and 17.5% compare with CVX’s 14.7%, 5.5% and 7.6%, respectively.
POWR Ratings
While COP has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, CVX has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both COP and CVX have been graded an A for Momentum, consistent with their impressive price performance. COP has surged 108.7% over the past nine months, while CVX grew 81.4%.
COP has a C grade for Value, which is in sync with its slightly higher-than-industry EV/Sales. COP’s 2.16x forward EV/Sales is marginally higher than the 2.15x industry average. CVX’s F grade for Value reflects its overvaluation. CVX’s 1.78x non-GAAP forward PEG is 97.4% higher than the 0.90x industry average.
Of the 102 stocks in the B-rated Energy - Oil & Gas industry, COP is ranked #28, while CVX is ranked #61.
Beyond what we have stated above, our POWR Ratings system has graded COP and CVX for Growth, Quality, Stability, and Sentiment. Get all COP ratings here. Also, click here to see the additional POWR Ratings for CVX.
The Winner
Amid the global energy supply crunch and rising demand, high prices should benefit COP and CVX. However, higher profitability and lower valuation make COP a better buy now.
Our research shows that the odds of success increase if one invests in stocks with an overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Energy - Oil & Gas industry.
COP shares were trading at $121.83 per share on Tuesday afternoon, up $4.45 (+3.79%). Year-to-date, COP has gained 70.91%, versus a -12.54% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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