Oil stocks are back in focus, with the ongoing Israel-Hamas war pushing oil prices higher on fears of a wider conflict in the Middle East that could disrupt supplies. Further, the recently announced mega deals in the sector have gained investors’ attention. Exxon Mobil (NYSE:XOM) is acquiring shale player Pioneer Natural Resources (NYSE:PXD) for $59.5 billion, while rival energy giant Chevron (NYSE:CVX) recently announced an agreement to acquire Hess Corporation (NYSE:HES) for $53 billion.
Flush with cash from the stellar profits made last year from the spike in oil prices, oil giants are strengthening their positions through strategic acquisitions and continue to bet on fossil fuels as the transition to clean energy is expected to be a long and expensive process. Also, U.S. oil giants are expanding their footprint near home due to rising geopolitical uncertainties.
Exxon Mobil (XOM)
Oil and gas behemoth Exxon Mobil (NYSE:XOM) delivered phenomenal profits last year, as the Russia-Ukraine war caused a spike in energy prices. However, the company’s recently reported third-quarter results reflected a decline in the adjusted earnings per share (EPS) to $2.27 from $4.45 in the prior-year quarter, as energy prices have cooled down compared to the elevated levels seen last year.
Nonetheless, earnings were up sequentially due to an increase in crude prices in the quarter and higher refining throughput.
Exxon is confident about the road ahead and expects the $59.5 billion Pioneer Natural acquisition to bolster its position in the Permian Basin and generate double-digit returns by efficiently recovering more resources. The company also expects its Denbury (NYSE:DEN) acquisition, announced earlier this year, to enhance its Low Carbon Solutions business.
On Oct. 25, JPMorgan analyst Phil Gresh reaffirmed a “buy” rating on Exxon stock and reduced his price target to $134 from $137, as he updated his model for the company to reflect modest dilution due to the Pioneer Natural deal.
Gresh believes that this acquisition is a good decision strategically due to Pioneer’s overlapping acreage in the Midland Basin and its huge undeveloped Tier I inventory.
With 13 buys and six holds, Exxon earns a “moderate buy” consensus rating. The average price target of $128.84 implies about 22% upside potential. It is worth noting that Exxon recently announced a 4% hike in its quarterly dividend to 95 cents per share. XOM’s dividend yield stands at 3.6%
Chevron (NYSE:CVX) shares declined last week, as the integrated oil and gas company missed analysts’ third-quarter earnings expectations by a wide margin. The company’s adjusted EPS of $3.05 was way below $5.56 in Q3 2022 and also lower than $3.08 in the second quarter of 2023.
A decline in crude prices compared to last year and lower margins on refined product sales impacted the company’s performance. Moreover, Chevron had cautioned earlier that the maintenance activity in its oil and gas production and refining businesses would weigh on its third-quarter results.
Looking beyond the near-term pressures, the company is confident about its prospects in the traditional and new energy businesses. CVX recently completed the acquisition of PDC Energy, which will enhance its position in the Denver-Julesburg (DJ) Basin and Permian Basin.
Also, the company’s decision to acquire Hess Corporation will boost its oil and gas output and diversify its asset base. In particular, Chevron expects to benefit from the Stabroek oil block in Guyana and Hess’ Bakken assets, which would enhance its U.S. shale exposure.
On Oct. 30, Bank of America analyst Doug Leggate upgraded Chevron stock to “buy” from “hold” and raised the price target to $200 from $190. The analyst believes that the recent selloff in the stock following the Q3 print “looks overdone.” He thinks that the investment case reset for Chevron “warrants another look,” given the favorable impact of the Hess acquisition on the company’s outlook.
Wall Street has a “moderate buy” consensus rating on Chevron stock based on nine buys and six holds. At $184.88, the average price target implies a 27.5% upside from current levels. The stock also offers an attractive dividend yield of 4.2%.
Oilfield services company SLB (NYSE:SLB), formerly called Schlumberger, generated 24% growth in adjusted EPS and an 11% rise in revenue in the third quarter of 2023. Consistent growth in the company’s international business is driving its performance. Notably, Q3 2023 marked the ninth consecutive quarter of double-digit year-over-year growth for the company’s international business.
Management believes that the company is well-positioned to benefit from the ongoing multi-year growth cycle in the oil and gas industry, mainly due to its significant exposure to international and offshore markets.
In its international markets, SLB is seeing strong growth in Saudi Arabia, the United Arab Emirates, Kuwait and Egypt. Aside from robust international activity, the company is also gaining from resilient investment in the offshore markets, mainly in Africa, Brazil and Scandinavia. The recent completion of SLB’s OneSubsea joint venture with Aker Solutions and Subsea 7 is expected to expand the company’s footprint in the offshore market.
Following the Q3 print, Susquehanna analyst Charles Minervino updated his estimates for SLB and reiterated a “buy” rating with a price target of $72. Minervino noted that the company’s solid international presence more than offset the weakness in its North America business. The analyst expects the company to continue to gain from a multi-year spend cycle in international markets.
SLB scores Wall Street’s “strong buy” consensus rating, backed by 14 buys against just one hold recommendation. The average price target of $70.92 implies 26% upside potential. SLB offers a dividend yield of 1.8%.
In conclusion, analysts are highly bullish on SLB, while they are cautiously optimistic about Exxon Mobil and Chevron. However, due to the recent pullback, Chevron stock offers higher upside potential than the other two stocks. Moreover, CVX stock offers a higher dividend yield than SLB and Exxon.
On the date of publication, Sirisha Bhogaraju did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.