With forecasts indicating oil prices to further shoot up by the end of this year, coupled with mounting demand and looming fear of escalating geopolitical tensions in the Middle East, this article examines the fundamentals of two leading industry players, Exxon Mobil Corporation (XOM) and Energy Transfer LP (ET) to determine which stock is the more favorable buy amid the industry prospects.
Before delving further into the intricacies of these stocks for a clearer perspective, let’s first briefly examine the industry dynamics.
Last week, OPEC reaffirmed its forecast for strong growth in global oil demand for 2024 and 2025 and revised its economic growth projections for both years upwards, highlighting additional potential for growth. According to the organization, an additional momentum in economic growth could provide further support to oil demand.
The monthly report from OPEC indicates that world oil demand is projected to rise by 2.25 million barrels per day (bpd) in 2024 and by 1.85 million bpd in 2025, consistent with the previous month's forecasts. Additionally, the organization now anticipates global economic growth to reach 2.7% this year and 2.9% in 2025, driven by expected inflation easing.
On the other hand, despite plunging demand in the United States and Europe during December 2023, the surge in demand for oil across Asia outweighed these declines.
According to the latest data from the Joint Organizations Data Initiative (JODI), global oil demand experienced a significant uptick in December 2023, surpassing November's figures by more than 500,000 bpd. This surge marks the eighth consecutive monthly record set in 2023.
Meanwhile, lingering geopolitical tensions and disruptions to commercial shipping in the Red Sea have been providing a significant boost to oil prices. With these conflicts continuing to influence market dynamics alongside seasonal increases in demand, Deutsche Bank analysts project the price of Brent crude to ascend to $88 per barrel by the conclusion of 2024.
Considering the solid industry outlook, both XOM and ET should reap the benefits. However, in terms of price performance, ET appears to have outshined XOM by surging 14.2% over the past six months, compared to XOM’s 3.6% plunge during the same period.
Likewise, ET’s shares have jumped 8.4% over the past three months to close the last trading session at $14.85. In contrast, XOM’s shares gained marginally over the past three months to close the last trading session at $104.85.
However, to determine which Energy - Oil & Gas stock could be the ideal buy, let’s dig deeper into their fundamentals:
Recent Developments
On November 2, 2023, XOM officially completed its acquisition of Denbury Inc. through an all-equity deal of $4.90 billion. Through this acquisition, XOM significantly expanded its owned and operated CO2 pipeline network in the United States. The company now boasts the largest network in the country.
Additionally, the company has secured access to more than 15 strategically positioned onshore CO2 storage sites. Furthermore, the acquisition encompasses Gulf Coast and Rocky Mountain oil and natural gas operations, which include proved reserves exceeding 200 million barrels of oil equivalent as of year-end 2022.
Conversely, on November 3, 2023, ET successfully completed its merger with Crestwood Equity Partners LP, solidifying its dominant position in the midstream sector. The acquisition expands ET’s ownership of pipelines and assets to over 125,000 miles across 41 states, bolstering its presence in major U.S. regions.
The transaction boosts ET’s distributable cash flow per unit, bringing in substantial cash flows from long-term contracts and acreage dedications. The integration of the two companies is projected to yield annual run-rate cost and efficiency synergies of at least $40 million, with additional financial and commercial benefits anticipated.
Recent Financial Results
For the fiscal fourth quarter, which ended on December 31, 2023, XOM’s total revenues and other income declined 11.6% year-over-year to $84.34 billion. The company’s attributable net income and EPS came in at $7.63 billion and $1.91, down 40.2% and 38.2% from the prior quarter, respectively.
However, during the same quarter, its cash and cash equivalents stood at $31.54 billion, increasing 6.4% compared to $29.64 billion as of December 31, 2022.
In the fiscal fourth quarter, which ended on December 31, 2023, ET’s revenues increased marginally year-over-year to $20.53 billion. Its net income attributable to partners and net income per share rose 14.9% and 8.8% from the year-ago value to $1.33 billion and $0.37 per share, respectively. In addition, the company’s adjusted EBITDA came in at $3.60 billion, up 4.8% from the year-ago value.
Past and Expected Financial Performance
XOM’s revenue has grown at CAGRs of 23.4% and 3.8% over the past three and five years, respectively. While its levered FCF has improved at a CAGR of 433% over the past three years. However, analysts predict XOM’s revenue and EPS for the fiscal first quarter (ending March 2024) to plunge 10% and 29.5% year-over-year to $77.88 billion and $1.99, respectively.
Conversely, ET’s revenue has improved at CAGRs of 26.4% and 7.8% over the past three and five years, respectively. While its levered FCF has increased at a CAGR of 188.5% over the past three years. Street expects ET’s revenue and EPS for the fiscal first quarter (ending March 2024) to increase 21.4% and 21.3% from the year-over-year to $23.06 billion and $0.39, respectively.
Valuation
In terms of the forward non-GAAP P/E ratio, XOM’s 12.17x is 35.2% higher than ET’s 9.00x. Likewise, XOM’s forward Price /Sales multiple of 1.22 is 117.9% higher than ET’s 0.56. Furthermore, XOM’s forward Price/Cash Flow multiple of 7.60 is 89.5% higher than ET’s 4.01.
Thus, ET is more affordable.
POWR Ratings
XOM has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, ET has an overall rating of B, translating 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 C grade for Growth, justified by its mixed financial growth in the fourth quarter. Whereas, ET’s B grade for Growth is in sync with its solid financial performance in the fourth quarter.
Moreover, XOM has a D grade for Value, consistent with its stretched valuation metrics. In terms of the forward non-GAAP P/E, XOM’s 12.17x is 17.3% higher than the industry average of 10.38x. Similarly, the stock’s forward EV/EBITDA ratio of 5.98x is 10.6% higher than the 5.41x industry average.
On the other hand, ET’s B grade for Value is justified by its discounted valuation metrics. In terms of the forward non-GAAP P/E ratio, ET’s 9.00x is 13.4% lower than the industry average of 10.38x. Likewise, ET’s forward Price/Sales ratio of 0.56x is 60.3% lower than the 1.40x industry average.
Furthermore, XOM has a D grade for Sentiment, justified by its unfavorable analyst estimates for the to-be-reported quarter. In contrast, ET has a B grade for Sentiment, consistent with its upbeat analyst estimates for the upcoming quarter.
Among the 83 stocks in the Energy - Oil & Gas industry, XOM is ranked #50, while ET is ranked #2.
Beyond what we’ve stated above, we have also rated both stocks for Momentum, Stability, and Quality. Click here to view XOM ratings. Get all ET ratings here.
The Winner
The energy sector’s prospects are shining amid a surge in oil prices resulting from geopolitical conflicts and heightened demand. That being said, both XOM and ET stand to benefit from the current industry tailwinds. Yet, ET’s stronger financial standing, positive analyst projections, and more attractive valuation make it a preferable investment option compared to XOM.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Energy - Oil & Gas industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
XOM shares were trading at $104.72 per share on Thursday morning, down $0.13 (-0.12%). Year-to-date, XOM has gained 5.71%, versus a 6.18% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
XOM vs. ET - Which Energy Stock Is a Stronger Buy? StockNews.com
