In this article, I evaluated two energy stocks, Exxon Mobil Corporation (XOM) and Adams Resources & Energy, Inc. (AE), to determine which has the potential for better returns this week. We believe AE is the better buy for reasons explained throughout this piece.
This Monday, the Organization of the Petroleum Exporting Countries (OPEC) increased its medium- and long-term forecasts for global oil demand. According to the oil producer group, the crude sector would require nearly $14 trillion of investment to meet this demand increase.
In its 2023 World Oil Outlook, OPEC expects global demand for oil to reach 116 million barrels per day (bpd) by 2045, up from 99.6 million bpd in 2022 and approximately 6 million more bpd than it forecasted in last year’s report. In the medium term, the group anticipates world oil demand to reach 110.2 million bpd by 2028, up 10.6 million bpd compared to 2022.
OPEC left its short-term forecast for growth in oil demand unchanged. It expects world demand to grow by 2.44 million bpd in 2023 and 2.25 million bpd in 2023.
Further, demand for natural gas will likely remain robust this year and beyond. U.S. Energy Information Administration (EIA) forecasts that electricity generation from natural gas will account for nearly 42% of U.S. generation this year, up from 39% in 2022.
Solid crude demand and tight supply dynamics will likely keep oil prices higher this year and beyond. In addition to earlier cuts made by other OPEC+ nations, Saudi Arabia, the major crude exporter, extended its 1 million bpd voluntary oil production cut until the end of 2023. Fellow oil producer Russia also announced an extension of its 300,000 b/d reduction of exports until the year-end.
Last month, oil prices climbed to their highest level in more than a year due to recent output cuts and lower crude oil inventories in the United States. The U.S. West Texas Intermediate futures touched $95.03 per barrel on September 28, the highest since August 2022. Also, Brent touched the highest level since November 2022.
Although the rally flattered briefly, oil prices could surge further due to escalating geopolitical instability amid the ongoing conflict between Israel and Hamas. Pioneer Natural Resources CEO Scott Sheffield said oil prices could increase significantly if Iran gets involved in the war.
With higher crude prices and soaring demand for oil and gas worldwide, the outlook for the energy sector looks bright. The global oil and gas market is expected to reach $8.67 billion by 2027, growing at a CAGR of 4.3%. Major companies in the market are adopting big data analytics and AI to enhance decision-making abilities, thereby driving their profits.
Energy stocks XOM and AE will likely benefit from the industry’s growth prospects.
XOM has plunged 9.4% over the past month compared to AE’s 11.2% decline. XOM has slumped 3.5% year-to-date, while AE fell 18.7%. In addition, XOM has gained 8.2% over the past year compared to AE’s returns of 2.6%.
But here are the reasons why we think AE could perform better in the near term:
Latest Developments
On October 11, XOM and Pioneer Natural Resources (PXD) announced a definitive agreement for Exxon Mobil to acquire Pioneer. This merger will transform XOM’s upstream portfolio, more than doubling the company’s Permian footprint and creating an industry-leading, high-quality, high-return undeveloped U.S. unconventional inventory position.
On May 4, AE’s subsidiary, Phoenix Oil, Inc., acquired nearly 10.6 acres of land in the Gulf Inland Industrial Park in Dayton, Texas, to build a new processing facility with rail spur and siding, product storage, and truck rack. With this acquisition, Phoenix will build new infrastructure to serve its existing customers and create opportunities to expand the business.
“I am pleased to see the Phoenix team execute this piece of their strategic plan. Joining Adams has enabled them to expedite this transaction, which will allow us to add services and flexibility to our continually evolving industry. We look forward to developing this property over the next few years to create additional long-term value for our customers and our shareholders,” said Kevin Roycraft, AE’s CEO and President.
Recent Financial Results
XOM’s revenues and other income decreased 4.2% sequentially to 82.91 billion for the second quarter that ended June 30, 2023. Its non-GAAP earnings were $7.67 billion or $1.94 per common share, compared to $11.62 billion and $2.83 in the first quarter of 2023. Non-GAAP cash flow from operations and asset sales was $10.67 billion, down 37.9% quarter-over-quarter.
During the second quarter that ended June 30, 2023, AE reported a total revenue of $624.80 million. The company’s net earnings of $827 thousand or $0.32 per common share, compared to a net loss of $2 million or $0.79 per common share for the first quarter of 2023. Also, adjusted cash flow of $7.10 million, compared to $4.70 million for the previous quarter.
Past And Expected Financial Performance
XOM’s revenue and EBITDA have grown at CAGRs of 19.8% and 48% over the past three years, respectively, while its net income has increased at a CAGR of 93.2%. In addition, the company’s total assets have grown at a CAGR of 0.2% over the same period.
Street expects XOM’s EPS and revenue to decline 48.3% and 24.5% year-over-year to $2.30 and $84.60 billion, respectively, for the third quarter that ended September 2023. Also, the company’s EPS and revenue for the fiscal year (ending December 2023) are expected to decrease 33.5% and 17.6% from the previous year to $9.35 and $340.78 billion, respectively.
Over the past three years, AE’s revenue and EBITDA have grown at 27.5% and 79.1% CAGRs, respectively. Also, the company’s total assets have increased at a CAGR of 9.5% over the same time frame.
For the current third quarter ended September 2023, AE’s EPS is expected to grow 70% year-over-year to $0.15. Furthermore, analysts expect the company’s EPS and revenue for the next fiscal year (ending December 2024) to increase 3.5% and 505% year-over-year to $2.73 billion and $0.81, respectively.
Valuation
In terms of forward EV/Sales, AE is currently trading at 0.05x, 96% lower than XOM, which is trading at 1.24x. AE’s forward EV/EBITDA multiple of 5.01 is lower than XOM’s 5.98. Moreover, AE’s trailing-12-month Price to Book and Price/Cash Flow of 0.87x and 2.33x compared to XOM’s 2.14x and 6.23x, respectively.
Thus, AE is relatively more affordable.
Profitability
XOM’s trailing-12-month revenue is 127.8 times what AE generates. Moreover, XOM is more profitable, with a trailing-12-month gross profit margin of 34.38% compared to AE’s 1.28%. Additionally, XOM’s trailing-12-month EBITDA margin and net income margin of 21.51% and 14.06% are higher than AE’s 0.74% and negative 0.22%, respectively.
Also, XOM’s trailing-12-month ROE and ROA of 27.20% and 12.04% favorably compared to AE’s negative 4.82% and negative 0.97%, respectively.
POWR Ratings
XOM has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, AE has an overall rating of B, which translates to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. XOM has a grade of D for Sentiment, in sync with its unfavorable analyst estimates. On the other hand, AE has an A grade for Sentiment, consistent with optimistic analyst expectations.
In addition, XOM has a D grade for Value, in sync with its higher-than-industry valuation. The stock’s Price/Book and Price/Cash Flow of 2.09x and 7.67x are higher than the industry averages of 1.66x and 5.17x, respectively.
On the contrary, AE has a B grade for Value, justified by lower valuation relative to its peers. The stock’s forward EV/Sales and Price/Sales of 0.05x and 0.03x are favorably lower than the respective industry averages of 2.19x and 1.54x.
Of the 88 stocks in the Energy - Oil & Gas industry, XOM is ranked #42, while AE is ranked #5.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, and Quality. Click here to view XOM ratings. Get all AE ratings here.
The Winner
With rising crude oil prices and soaring demand for oil and gas worldwide, the energy industry’s prospects appear promising, providing growth opportunities for Exploration and Production (E&P) companies. Also, companies in the oil and gas industry are increasingly adopting digital technologies to drive their profits.
Hence, energy companies XOM and AE are expected to benefit from the industry’s tailwinds. However, AE’s relatively poor financials, elevated valuation, and bleak near-term outlook make its competitor, AE, the better buy now.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Energy - Oil & Gas industry here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
XOM shares rose $1.28 (+1.20%) in premarket trading Friday. Year-to-date, XOM has declined -1.08%, versus a 14.65% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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