Energy stocks like British Petroleum, Exxon Mobil, and Shell have tremendous upside potential, despite a concerted effort to develop and deploy renewable energy alternatives.
Is It Wise to Invest in Energy Companies like BP, XOM, and RDS.A?
Source: Google Stocks December 5, 2019
Industry aficionados agree that Exxon Mobil Corp (NYSE: XOM) is a juggernaut in the energy sector. With truly global operations, this integrated multinational conglomerate is involved in scores of verticals and horizontals, including marketing of energy-related products, transportation, downstream, midstream, and upstream activities, et al. Exxon Mobil Corp has a market capitalization of $290.825 billion, ranking it among the most heavily capitalized companies in the world. According to PricewaterhouseCoopers, the global top 100 companies by market capitalisation (July 2019) includes Exxon Mobil at #10, which is in the oil and gas sector with a March 31, 2019 capitalization of $342 billion. While the valuation has dropped markedly since then, it still ranks in the top 20 most heavily capitalized companies.
Source: Bloomberg with PwC analysis
Market valuations aside, it is important to ascertain the reasons why traders and investors are interested in trading stocks of oil and gas companies like Exxon Mobil. For starters, the 1-year target is the price for XOM is $79.20 – that represents a $10 premium over the current price, and a 14.6% return on investment at today’s prices. Beyond forecasting models, the 52-week trading range of the stock is $64.65 on the low end and $83.49 on the high end. With a price-earnings ratio of 20.03, analysts believe that the stock is trading near fair value. On a rating scale of 1 (Strong buy) to 5 (Sell), analysts have issued a 2.8 rating which is firmly between a buy and a hold.
While the world levels assaults at the oil and gas industry for greenhouse gas emissions and destruction of natural habitats, one indisputable fact remains: we need copious amounts of oil and gas to feed the world’s economic engine. Indeed, this sentiment is shared by none other than Bank of America Merrill Lynch which believes that Exxon Mobil stock could ‘Surge by up to 47%,’ in 2020 as the oil giant continues to expand operations globally. In fact, bullish sentiment is pervasive across the financial world vis-a-vis Exxon Mobil Corp. If the company stock hits its target, it will obliterate the 52-week high of $83.49, at $100 per share in 2020 and set a new precedent for trading. To get there, several benchmarks need to be breached. For starters, the price of crude oil needs to rise beyond its current levels, demand needs to increase, and OPEC needs to steady its output capacity. Yet, XOM is not the best performing oil and gas sector stock in the market.
Chevron Corporation has delivered better returns to investors with an average of 25.21% total return price percentage since 2016. Exxon Mobil Corp’s return price percentage is -12.56%, indicative of the sharp decline in oil prices that have taken place in recent years. Exxon has not taken its lacklustre performance lying down however. It has laid out a strategic blueprint to double its earnings capacity, and significantly increase its operating cash flow within the next five years. In the words of Darren Woods, CEO of Exxon Mobil, ‘… We’ve got the best portfolio of high-quality, high-return investment opportunities that we’ve seen in two decades…’ If Exxon meets its production quota of 5 million oil barrels per day, this will certainly increase the bottom line and generate strong returns for investors.
Despite Outrage, Oil Companies are Lucrative Investments
The world’s reliance on crude oil is a double-edged sword. We do so at our peril, harming the environment by using this nonrenewable source of energy and polluting the atmosphere with CO2 emissions. However, there are no credible alternatives to boot. Energy companies are best positioned to invest in alternative fuel sources and technologies before the oil wells run dry. Dividends are an important part of an investor’s toolkit, and already Exxon Mobil Corp is right up there with the best of them. It is currently offering a 5% yield, with plenty of upside potential given the significant investments that are on the cards.
Oil stocks are being boosted by rising prices in Brent crude oil and WTI crude oil. Currently, the price of Brent crude oil – the international benchmark – is $63 per barrel, and the price of WTI crude oil (West Texas Intermediate) is $58.43 per barrel. The crude oil commodities market is robust, with strong gains being recorded year-on-year. This bodes well for the prices of stocks of leading oil and energy enterprises like Exxon Mobil Corp, British Petroleum, and Royal Dutch Shell. Traders and investors will certainly see the benefit of CFD trading on oil stocks, long-term investments in oil companies, and futures markets