DDespite weak oil and gas prices, many energy stocks were outbid following the release of exceptional quarterly results. High energy prices have translated into explosive profits for many energy producers. Although weakness in the commodities sector may extend into the end of the year, the recent energy bear market may have already anticipated such a continuation of the negative trend.
After such a strong quarter for the energy giants, many top energy stocks now have even more compressed earnings multiples. Indeed, the market does not consider the recent energy bonanza as sustainable. Yet energy prices are historically high, paving the way for more impressive cash flows in the medium to long term.
With that in mind, we used TipRanks’ comparison tool to check out three high-quality energy stocks – XOM, PSX and SHEL – that Wall Street analysts love, with a “Strong Buy” consensus rating. Let’s take a closer look.
Exxon Mobil (XOM)
Exxon Mobil is a former favorite of Warren Buffett and has been doing incredibly well year-to-date, up 45%. Since peaking in early June, XOM shares have been pretty bumpy, dipping just north of 20% before rising slightly to $88 and changing per share – down just under 15% from at their top.
The oil and gas giant smashed analyst estimates for its second quarter, with earnings per share of $4.14, well above consensus of $3.83. Exxon’s revenue jumped nearly 28% quarter-over-quarter (or 71% year-over-year) to $115.7 billion.
Indeed, this is unprecedented topline growth set to slow as oil finds a new (likely lower) range in which to settle. Although oil may struggle to stay above $100 a barrel, supply constraints due to Russia’s invasion of Ukraine could continue to keep oil prices well above current levels. before the pandemic.
It wasn’t just the favorable energy price environment to thank for Exxon’s incredible blowout result. The company’s cost-cutting program is beginning to bear fruit, and the recent increase in production has proven to be timely.
With stellar fundamentals and rising free cash flow, Exxon has the financial flexibility to continue investing in its business while reducing debt and rewarding shareholders with far-reaching dividend increases.
At the time of writing, XOM shares are trading at just 9.7x earnings, 1x sales and 6.2x operating cash flow, all of which are in line with industry averages.
After posting sensational results, many Wall Street analysts view Exxon Mobil as a formidable value play. I think they are right. Currently, there are 11 buys and three sells on the name. The average price target implies an upside potential of around 23.3% over the coming year. Meanwhile, the high price target of $125.00 implies a potential upside of 40.5% from the current price of $88.95, not including the bountiful dividend yield of 3.96%.
Philips 66 (PSX)
The stock Philips 66 is potentially a great way to play energy refinement. Year-to-date, shares of the downstream energy company are up just north of 15% — relatively subdued compared to producers like Exxon.
For its last (second) quarter, the company felt the strong industry winds at its back, helping to fuel a solid pace of earnings ($6.77 vs consensus estimate of $5.95). Revenue was $49.3 billion, up approximately 33% quarter over quarter.
Indeed, energy giants are posting growth numbers that speculative tech companies posted in early 2021. Like tech companies that went on bid last year, euphoric times are not expected not last. Luckily for the energy giants, investors don’t expect these good times to last. Still, their free cash flow windfall may be underestimated by investors inclined to take profits here following the recent drop in oil prices.
Philips 66 uses its financial windfall to reduce debt and return capital to shareholders. Earlier this year, the company increased its dividend by 5%. Enhanced share buybacks could also be considered, as the company ends up with enough cash to spoil shareholders. The company seeks to return approximately 40% of its cash flow to investors. While waiting for an oil crash, it looks like PSX shareholders are in for a treat. The dividend is currently yielding an impressive 4.63%.
The stock is trading at just 0.3x sales and 7.1x trailing earnings. These numbers, especially the first ones, seem to indicate some sort of value trap. Philips 66 seems to be the real value, however, with a wide moat protecting its economic benefits.
Wall Street appears to be in agreement, with nine buys and one hold, for a price target of $116 and an implied upside potential of 38.4% from PSX’s current price of $83.80. RBC (RY) Capital’s TJ Schultz is the latest analyst to maintain his buy rating, with a nice price target of $112.00.
Shell is a British energy kingpin that is worth going overseas for its added value. Like many energy giants, Shell saw its contract price/earnings (P/E) multiple rise significantly after the release of its second quarter figures. The financial results are good but in line with estimates.
With lower oil prices, second quarter earnings results had a fairly muted reaction, in my view. Shell stock is down about 15% from its all-time high of over $60 per share. Although Shell is slightly less sensitive to fluctuations in oil prices than its peers, given its long-term decline in production, I see Shell as a deep value that is really hard to ignore.
The stock trades at 5.5 times earnings, 0.6 times sales and 3.7 times operating cash flow. This is the lowest price, as far as I’m concerned. As management ramps up third quarter share buybacks after $7.4 billion in dividends and repurchases rewarded for investors in the second quarter, I think it’s hard to pass up the company as she continues to enjoy her huge free cash gain.
Shell’s bonanza won’t last forever; it’s not planned, and Shell has a plan to move forward after energy prices come down to Earth. With an intriguing power-as-a-service solution to look forward to, I see Shell as an excellent fossil fuel company open to the reality of a sustainable transition.
Wall Street sees real value to be had in Shell stock as it brims with free cash flow, with three buys, one hold and a consensus price target of $66.75 implying 28% upside potential, 4%.
The energy giants have been dealt a formidable hand in recent quarters. Although the windfall will not last forever, many may be underestimating the value to be had at this point. I don’t think low multiples lie to investors. Of the three stocks, analysts appear to be the most bullish on PSX stocks.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.