Energy stocks have been slumping in the current month. ExxonMobil (XOM) and Chevron (CVX) have fallen 5.5% and 5.8%, respectively, so far in October. Royal Dutch Shell (RDS.A) and BP (BP) have slumped 4.1% and 3.0%, respectively, month-to-date. Energy stocks also plunged in the third quarter.
Energy stocks compared to equity market and oil prices
Energy stocks are slumping due to falling equity markets and plunging oil prices. So far this month, the S&P 500 Index (SPY) has fallen 2.8%, and WTI crude oil prices are down 2.7%.
The markets are feeling the effects of rising tensions ahead of US-China trade talks. Tensions increased after the US reportedly blacklisted several Chinese companies due to human rights violations. This development also affected oil prices.
To add to oil’s woes, the EIA (US Energy Information Administration) has downgraded its oil price forecast on unfavorable demand-supply dynamics. The EIA expects more production from the US to offset cuts by OPEC+ in the next year. However, demand growth remains uncertain due to geopolitical tensions. Oil prices are relevant for integrated energy companies, as they’re one of the main determinants of upstream earnings.
However, now these stocks are entering earnings season. Besides, the falls in these stocks have lowered their valuations and boosted their dividend yields. Let’s look at which of these stocks could be good buys ahead of their third-quarter earnings releases.
Upcoming earnings season
Wall Street analysts expect integrated energy companies’ earnings to fall in the third quarter. They expect lower oil prices to affect upstream realizations and earnings. However, better upstream production could partly support their earnings. Plus, analysts expect weaker oil spreads to affect downstream earnings.
Among the integrated energy stocks discussed here, analysts expect ExxonMobil’s earnings to fall the most by 49% YoY. Their estimate is in line with the company’s guidance for its third-quarter earnings.
Further, analysts expect BP’s earnings to fall 35% YoY. However, they expect lower declines of 20% and 15% YoY, respectively, in Chevron’s and Shell’s profits.
Dividend yields of energy stocks
Most of the above-mentioned companies have paid growing and reliable dividends in recent years, but Shell’s dividend payments have remained stable. However, the company has an active share buyback program. Shell announced the next tranche of its program during its last earnings results.
The ongoing slump in energy stocks has raised some of these companies’ dividend yields. Shell and BP have higher dividend yields of 6.7% each. However, ExxonMobil’s and Chevron’s yields are lower at 5.2% and 4.3%, respectively.
The fall in energy stocks has lowered their valuations. While Shell and BP are trading at 10.0x and 10.1x forward PEs, Chevron and ExxonMobil are trading at 14.5x and 16.3x forward PEs, respectively. Shell’s and BP’s valuations are likely affected by their higher debt levels compared to ExxonMobil and Chevron.
In a scenario of declining earnings, the best bets in the energy sector could be Shell and Chevron. These two companies are expected to post the smallest earnings falls in the third quarter. Between these two energy stocks, Shell seems better placed, with a higher dividend yield and a lower valuation.