As prices for oil march higher to the high $60’s, not all oil majors are joining in on the rally. Exxon (NYSE: XOM) and Chevron (NYSE: CVX) are diverging, with Exxon being the bigger disappointment. Why?
Exxon, which trades at a 24x compared to 33x for Chevron, reported earnings of $1.09 a share as revenue grew 16.2% to $68.2 billion. But Royal Dutch Shell (NYSE: RDS) reported better results and also sold off. It now looks that when investing in energy stocks, wait for earnings before buying. Still, Exxon’s overall report was solid. Its dividend, yielding nearly 4%, is safe.
Exxon’s CapEx rose 17%year-on-year to $4.9 billion. While the ambitions in explorations are light, disappointing investors, Exxon does not want to get caught up in the energy rally just yet. Four years ago, energy soared, oil producers raised output, exploration activities jumped and deepwater drilling proved excessive. What followed was a horrific drop in prices.
This makes investing in BP plc (NYSE: BP), CVX, and Exxon suitable for the long-term. Prices may fluctuate with high volatility and energy supply may even increase. Yet in the long-term, the demand for energy will be higher than it is now, so buying energy stocks on weakness makes the most sense.
Regular dividend payments are an important factor in treating oil stocks as buy and hold ideas for the long-term.
The payout is covered from the cash flow and the business had a sharp improvement over the first quarter of 2017. Next quarter’s profit and revenue for Exxon, Chevron, and the others will be even better. Since the average price of oil and gas rose, especially outside the U.S. markets, oil stocks will bounce back from any selloff in the near-term. Exxon’s share buyback of five million shares in the first quarter offsets the $425 million in stock-based compensation.
Takeaway
The climate for the oil market is positive. Exxon’s quarter was affected by one-time, temporary factors.
Disclosure: Author owns BP shares.
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