Oil prices are falling, but earnings estimates for energy companies continue to rise – these stocks are cheap

Oil prices fell after peaking earlier this year. But earnings estimates for energy companies continued to rise on stronger demand and weak capital spending.

Below is a screen of large cap oil stocks as a starting point for investors.

Take a look at a 10-year chart of the first month rolling quotes for West Texas Intermediate (WTI) CL.1 crude oil,
+2.64%
:

Investors turned away from energy stocks after oil’s long decline from mid-2014 to early 2016.


Leaving aside the distortion in the energy market at the start of the coronavirus pandemic in 2020, some investors have had little confidence in oil and natural gas stocks since the sharp drop in prices from mid-2014 to early February. 2016.

But the balance between supply and demand has shifted, with oil companies cutting capital spending in recent years even as demand has grown.

WTI was trading at $93.11 a barrel on Aug. 11, down 29% from its intraday high at $130.50 on March 7. But it was still up 24% since the end of 2021, when it traded at $75.21. That was before Russia disrupted the global energy market by invading Ukraine.

As always, there are many moving parts for power. The Organization of the Petroleum Exporting Countries lowered its 2022 oil demand forecast. Again, analysts at BCA Research led by the firm’s chief commodities and energy strategist, Robert Ryan, predicts that Brent crude oil BRN00,
+2.28%
would average $117 a barrel in 2023 because “oil balances will always remain skewed toward deficit conditions.” Brent was trading at $97.40 on August 11.

First example: Exxon Mobil

Even though oil had already fallen significantly at the start of the second quarter, industry profits rose sharply in the three months to June. For example, XOM from Exxon Mobil Corp.,
+2.54%
Second quarter profit was $17.85 billion, compared to $5.48 billion in the first quarter and $4.78 billion in the second quarter of 2021. Looking ahead, the consensus estimate for analysts polled by FactSet is that Exxon Mobil will earn $14.55 billion in the third quarter. That would be down from the second quarter, but still more than double its earnings of $6.75 billion in the third quarter of 2021.

An important factor for investors is that the rolling 12-month earnings per share estimates – on which forward price-earnings ratios are based – keep rising.

Exxon Mobil’s forward P/E is 8, compared to 8.2 for the energy sector S&P 500 and 18 for the broader S&P 500 SPX,
+0.36%.
Exxon’s P/E is based on its closing price of $91.45 on Aug. 10 and a consensus 12-month forward earnings estimate of $11.50, among analysts polled by FactSet. The trailing 12-month EPS estimate for Exxon rose 6.5% from $10.79 a month ago, even as the price of WTI fell 12%.

A screen of large-cap energy stocks

The S&P 500 energy sector is made up of 21 companies and is tracked by Energy Select Sector SPDR Fund XLE,
+3.02%.
This ETF’s forward P/E is 8.2 and its consensus 12-month EPS estimate has risen 4% over the past month.

For a broader approach, the iShares Global Energy ETF IXC,
+2.87%
owns all the shares of XLE, while adding major international players, such as Shell PLC SHEL,
+3.00%,
TotalEnergies SE TTE,
+2.89%,
BP PLC BP,
+2.69%,
Enbridge Inc. ENB,
+0.73%
and Canadian Natural Resources Ltd. CNQ,
+3.82%.
IXC’s forward P/E is just 6.9; its consensus 12-month EPS estimate was up 4% from a month ago.

Both ETFs offer broad exposure to the oil and natural gas sectors. But some investors may want to dig deeper into individual names. So the next screen started with IXC’s 47 stocks.

Many people look to the energy sector for dividends. But a very high dividend yield is a warning that investors – especially well-informed institutional investors – expect the payout to be reduced. So we started this screen by removing the four stocks with dividend yields above 10%.

Next, we looked at dividend coverage in more detail. One way to estimate the ability to pay dividends is to look at free cash flow estimates. We can divide the estimated free cash flow per share by the current share price for an estimated FCF yield. If this is higher than the current dividend yield, a company appears to have “wiggle room” to increase its dividend, buy back shares, or take other actions that may benefit investors.

Of the remaining 43 stocks held by IXC, consensus forward FCF estimates are available from FactSet for 42, and 40 have an estimated wiggle room of at least 1%.

Here are the remaining 10 companies with single-digit P/E ratios whose consensus 12-month EPS estimates rose the most over the past month. All have high levels of indicated FCF margin:

Company Teleprinter PER before Rolling 12-month EPS estimate increase from prior month Dividend yield Estimated return in FCF Estimated FCF margin

Marathon Petroleum Corp.

MPC,
+1.47%

6.4

28.8%

2.44%

17.03%

14.59%

Valero Energy Corp.

VLO,
+1.65%

6.0

17.0%

3.51%

17.61%

14.10%

Phillips 66

PSX,
+2.36%

6.6

12.3%

4.53%

17.16%

12.63%

Eni SpA

ENI,
+1.45%

3.8

9.8%

7.70%

24.73%

17.03%

Cenovus Energy Inc.

CVE,
+6.23%

4.4

8.6%

1.90%

18.58%

16.68%

Exxon Mobil Corp.

XOM,
+2.54%

8.0

6.5%

3.85%

11.03%

7.18%

Canadian Natural Resources Ltd.

CNQ,
+4.44%

6.0

5.6%

4.36%

20.83%

16.47%

Imperial Oil Ltd.

IMO,
+4.48%

5.2

4.0%

2.43%

21.59%

19.16%

Suncor Energy Inc.

SU,
+3.08%

4.3

3.5%

4.77%

21.08%

16.31%

Devon Energy Corp.

NDV,
+7.13%

6.3

3.5%

7.76%

16.18%

8.42%

Source: FactSet

You should do your own research to form your own opinion on the individual stocks you are considering buying. One way to start is to click on the tickers in the chart for more information. Then read Tomi Kilgore’s detailed guide to the wealth of information on the MarketWatch quote page for free.