Impact of Lackluster Earnings on XOM and CVX -- What's Next for the Energy Stocks?

Oil behemoths Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX) recently reported third-quarter results, indicating enduring difficulties in accelerating oil production growth. Earnings have significantly dropped from the year-ago quarter, failing to meet the Wall Street projections. Nonetheless, both firms reported an upswing in earnings quarterly.

XOM's oil production has tumbled, while CVX has faced setbacks impacting key growth endeavors in Kazakhstan and the major hubs of oil production, including the Permian Basin in West Texas and New Mexico.

The market reaction to the earnings reports was swift and severe. CVX’s shares plunged about 7%, and a descent of 1.9% in XOM's shares was observed despite rising oil prices due to escalating tensions in the Middle East. This response underscores investor anxieties about these fossil fuel behemoths' long-term viability and fiscal discipline relative to sectors like technology.

Both companies confirmed technical issues in the Permian region, including constraints on wastewater production, high concentrations of carbon dioxide in natural gas, and challenges encountered by production partners during fracking operations. The complications of oil production expansion, coupled with operational problems, are anticipated to influence a surge in industry-wide costs.

However, not all seems grim for the oil corporations. The oil majors are reportedly amplifying their capital investments within the oil and gas sector, undeterred by growing global consensus on a shift towards clean energy alternatives. The acquisitions underscore the enduring interest of the oil companies in profitable oil and gas ventures.

These strategic moves suggest that these corporations do not anticipate a decline in oil demand in the future. Instead, they lean toward believing that oil's role will remain pivotal in the world's energy matrix for the foreseeable future.

The International Energy Agency's (IEA) forecast of oil demand peaking by 2030 amid expanded use of renewable energy sources. The prediction undermines the justification for increased expenditure on fossil fuels and further prompts the question of why cash-rich oil titans are not pivoting toward green energy ventures.

The answer lies partly in the clean energy transition being a long-term, costly process, complicated further by the current economic backdrop of persistent inflation, escalating borrowing expenses, and continual supply chain difficulties.

For the past two years, geopolitical instability – from Russia's military aggression in Ukraine to long-standing conflicts in the Middle East, has fostered unpredictability in energy prices. This has prompted concerns over energy demand, infusing uncertainties in the market. Additionally, easing oil and natural gas prices has exacerbated the profitability challenges of XOM and CVX.

A cautious approach has pervaded the market, with participants adopting a vigilant stance, awaiting the outcomes of pivotal events, including the U.S. Federal Reserve policy meeting and China’s latest manufacturing data.

In its most recent Commodity Markets Outlook, the World Bank projected global oil prices to reach around $90 a barrel during the last quarter of the year before diminishing to an average of $81 a barrel throughout the coming year as global economic growth decelerates. Such a decline could cast a shadow over the financial health of XOM and CVX.

These corporations, heavily vested in the extraction and sale of oil and gas, stand at risk of substantial revenue reductions, which could compromise their net profitability. Dwindling prices could pose formidable challenges for these companies in securing funds for new ventures and investments, jeopardizing their future profitability.

On the flip side, however, OPEC+ and Russia’s prolonged production cuts, in addition to the geopolitical turmoil, could exacerbate supply chain disruptions, propelling oil and gas prices in the future. This development creates a conducive climate for extraction and ensuing production activities.

Let’s see some other factors that have the potential to influence the stocks’ performance in the near term:

Exxon Mobil Corporation (XOM)

With a market cap of over $419 billion, XOM explores and produces crude oil and natural gas in the United States and internationally.

The cash influx enabled XOM to authorize a $60 billion acquisition of Pioneer, which attracted international media attention. Experts predict the strategic maneuver could boost XOM's domestic oil production twofold, catapulting the company into the top tier of American producers. It could stimulate added consolidation within this fragmented sector, strengthening American shale producers' role as the commanding players in the international oil market.

However, XOM's third-quarter profits fell by over half of its record high last year due to a decline in oil and gas price realizations, although the company's refinery throughput rose to 4.2 million barrels a day, the most since XOM merged with Mobil 24 years ago. The energy giant’s revenue slid 19% year-over-year to $90.76 billion, while non-GAAP earnings per share reached $2.27, falling short of analysts' predictions.

The dwindling profits were influenced by an approximately 60% decrease in natural gas price realizations and a 14% reduction in oil price realizations. The company also reported a 69.9% decline in earnings from its chemical products division due to increased feedstock prices and overproduction.

In the quarter, it returned $8.1 billion to the shareholders, comprising $3.7 billion in dividends and $4.4 billion in share buybacks.

Moreover, XOM announced an increase in its fourth-quarter dividend to $0.95 per share, payable on December 11, honoring its excellent history of shareholder returns. A testament to the company's reputation is its consistent record of paying dividends for 40 uninterrupted years.

Its annual dividend rate of $3.80 per share translates to a dividend yield of 3.60% on the current share prices. The company’s dividend payouts have grown at a CAGR of 1.5% over the past three years and 2.7% over the past five years.

The stock trades lower than the 50-, 100-, and 200-day moving averages, indicating a downtrend. However, Wall Street analysts expect the stock to reach $128.32 in the next 12 months, indicating a potential upside of 21.6%. The price target ranges from a low of $105 to a high of $150.

Institutions hold roughly 60.4% of XOM shares. Of the 3,637 institutional holders, 1,589 have increased their positions in the stock. Moreover, 147 institutions have taken new positions (9,154,521 shares).

For the fiscal fourth quarter ending December 2023, analysts expect its revenue and EPS to be $92.28 billion and $2.20, respectively.

Chevron Corporation (CVX)

Boasting a market cap of over $275 billion, CVX offers administrative, financial management, and technology support services for energy and chemical operations.

The firm's recent $53 billion acquisition of Hess, recognized as one of the largest operators in North Dakota's Bakken shale play, substantiates its massive investment amid the global shift towards cleaner energy. Even though this transaction could slightly increase the region's oil production, industry analysts do not anticipate a revival to its peak pre-pandemic boom days.

Bakken oil production is anticipated to drop to 1.15 million bpd from 2026 and remain stagnant until 2030. A slow decay will follow this due to depleting reserves. It is yet to be ascertained if an infusion of new investments or technological advancements can counteract a longer-term decrease in Bakken output.

CVX also emphasizes the importance of consistent dividend distribution, demonstrating an unwavering commitment to operational diversity, having done so for an impressive 35 consecutive years. This reliability is quite remarkable considering the unpredictable nature of the energy sector.

In 2023, the company paid a dividend of $6.04 per share, which translates to a dividend yield of 4.18% on the current share prices. The company’s dividend payouts have grown at a CAGR of 5.6% over the past three years and 6% over the past five years. Although, it is worth noting that the decline in dividend payout rate over time might adversely influence investors seeking a steady source of passive income.

CVX adopts a moderate approach concerning leverage. During periods with low oil prices, the company can incur debt to finance its capital investment needs and maintain dividend payouts. When energy prices rebound, which historically they always have, the company can offset the debt. This prudent strategy offers reassurance to even the most conservative investors about the integrity of the company's dividend capabilities.

For the fiscal third quarter that ended September 30, 2023, CVX's upstream production segment earnings dipped 38.2% year-over-year to $5.76 billion. However, it increased only 16.6% from the second quarter, despite the substantial increase in oil prices.

Profit in CVX's non-U.S. production segment, accounting for about two-thirds of its total output, declined 37.7% year-over-year but increased about 12% quarterly. Its U.S. production earnings increased 26.4% quarterly but declined 39% year-over-year.

The U.S. net oil-equivalent production was up 20% year-over-year and set a new quarterly record, primarily due to the acquisition of PDC Energy, Inc., which supplemented the quarter's output with an additional 179,000 oil-equivalent barrels per day, and net production increases in the Permian Basin.

The stock trades lower than the 50-, 100-, and 200-day moving averages, indicating a downtrend. However, Wall Street analysts expect the stock to reach $189 in the next 12 months, indicating a potential upside of 30.9%. The price target ranges from a low of $166 to a high of $215.

Institutions hold roughly 71.4% of CVX shares. Of the 3,473 institutional holders, 1,718 have increased their positions in the stock. Moreover, 203 institutions have taken new positions (9,253,853 shares).

For the fiscal fourth quarter ending December 2023, analysts expect its revenue and EPS to come at $54.46 billion and $3.68, respectively.

Considering the oil stocks’ tepid price momentum, mixed analyst estimates, and financials, it could be wise to wait for a better entry point in the stocks.

3 Resilient Stocks to Safeguard Your Portfolio During Conflict

The decades-old Israel-Palestine conflict over territory held sacred to both nations saw its deadliest escalation when Hamas initiated a widespread onslaught early morning on October 7. The calamitous events that unfolded that day led to the most significant loss of lives.

The Israeli cabinet officially declared war against Hamas the next day. This was succeeded by an order from the defense minister to the Israeli Defense Forces (IDF) to put Gaza under a complete siege. Subsequently, bombings in the Gaza Strip commenced, ensnaring the region in a harrowing humanitarian crisis. The Gaza Strip, home to 2.3 million Palestinians, is rapidly depleting its reserves of water, fuel, and other supplies due to the imposed Israeli aid blockade.

Rocket fire exchanges have become a daily occurrence between the two factions, with Israel urging over a million civilian Palestinians residing in northern Gaza to evacuate ahead of a potential ground incursion. Furthermore, the risk of conflict proliferation is high, as witnessed by escalating cross-border strikes in Lebanon and Syria.

Casualties keep mounting on both ends of the battlefield with little to no signs of peaceful negotiations, especially after the blast at a hospital in Gaza has further intensified the loss of innocent civilian lives.

Sectors Affected by the Conflict

Amid amplifying tensions in the Middle East, the world is simultaneously confronting the diplomatic turbulence spurred by the Russia-Ukraine conflict and global economic instability underpinned by stubborn inflation and escalating interest rates.

In situations of military conflict, defense corporations often witness a rise in earnings, an effect reflected in the upward trajectory of aerospace and defense stocks when geopolitical strife unfolds. Military contractors' shares soared in the Israel-Hamas conflict's immediate fallout, attracting institutional and individual investors. The iShares U.S. Aerospace & Defense ETF (ITA) has spiraled upward about 7% since the initial onslaughts on Israel earlier this month.

The potential for disruptions in oil supply increases during such times and usually results in abrupt surges in oil prices. Furthermore, geopolitical unrest persuades investors to avoid risky stock market investments and instead explore safe-haven or defensive assets as a precaution against heightened escalation or worldwide economic deceleration. These assets encompass U.S. Treasury bonds, gold, utilities, and energy.

UBS Wealth Management states, “In a scenario where the conflict expands and draws in other regional actors, we believe safe-haven assets, including U.S. Treasuries and gold, would gain further from investors' attempts to hedge against stronger escalation or a global economic slowdown driven in part by higher oil prices.”

Early reactions to the unrest saw oil prices rising by about 3%, a slight drop in stock futures, and a 1% climb in gold, while Treasury futures experienced a rise, consequentially diminishing yields.

Given this backdrop, we undertake an in-depth analysis of stocks Lockheed Martin Corporation (LMT), ChampionX Corporation (CHX), and Dundee Precious Metals Inc. (DPMLF) now.

Lockheed Martin Corporation (LMT)

Amid burgeoning global geopolitical tension, interest in military spending has not dwindled, fueled by the necessity to refresh existing conflict arsenals and prepare for future defense requirements. This situation benefits LMT, whose sizable order backlog has remained robust at $156 billion due to healthy domestic and international demands.

Bethesda, Maryland-based company LMT, with a market cap of over $111 billion, reported a better-than-anticipated third-quarter revenue and profit as geopolitical unease stimulated sustained demand for its military equipment. Consequently, the U.S. defense contractor shares rose about 2%.

The conflict in Ukraine has elicited a need for restocking weaponry such as shoulder-fired missiles, artillery, and other arms, providing a profitable avenue for U.S. defense-related firms to secure significant contracts from the Pentagon.

Among the sought-after hardware are LMT's offerings, particularly its guided multiple-launch rocket system and Javelin anti-tank missiles. These products, which LMT co-produces with defense firm Raytheon Technologies Corporation (RTX), have emerged as critical components supporting the Ukraine war efforts.

LMT executives highlighted the ongoing conflicts in Israel and Ukraine as potential catalysts for revenue growth in the foreseeable future.

Despite these circumstances, LMT's operations continue to reel from the effects of ongoing pandemic-linked labor and supply chain disruptions. These interruptions are particularly detrimental to the company's aeronautics division, renowned for manufacturing the advanced F-35 fighter jet. Sales at its aeronautics unit, the largest by size, saw a 5.2% year-over-year decline in the third quarter that ended September 2023.

However, despite these challenges, the defense giant reported a 1.8% year-over-year boost in net sales, achieving $16.88 billion. The Missiles and Fire Control unit, producing the High Mobility Artillery Rocket System, saw a 3.8% uptick from the year-ago quarter, reaching $2.94 billion. LMT's earnings per share stood at $6.73, exceeding estimates.

LMT remains a mature, low-growth entity boasting robust profitability. On the one hand, it has prospects for expanding margins through easing supply chains and executing legacy contracts. Concurrently, it carries uncertainties regarding the margin impact of a classified missile program discussed during the earnings call.

Analysts expect LMT’s revenue and EPS for the fiscal fourth quarter ending December 2023 to come at $17.94 billion and $7.25. It surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

ChampionX Corporation (CHX)

Israel harbors significant ambitions to exploit its abundant offshore natural gas resources and establish a significant role as an energy hub in the Eastern Mediterranean, potentially becoming a central supplier to Europe. However, the surprise assault by Islamist militant group Hamas is causing Israel to falter, posing a global energy market disruption risk, most notably affecting regional gas supplies.

Following Hamas’ weekend attack, European natural gas and global oil futures spiked by 14% and 4%, respectively, reflecting accumulating apprehension and the potential escalation of conflict. This created ripples of uncertainty within the energy market.

Heightening global oil demand, combined with OPEC+ and Russia’s prolonged production cuts, have surged oil and gas prices, fostering favorable conditions for exploration and subsequent production activities. Recent oilfield service giant Baker Hughes report, indicates that the total U.S. rig count augments by two units to 624 for the week ending October 20, 2023.

Moreover, escalating oil prices can be attributed to concerns surrounding potential interference from Iran in the Strait of Hormuz, one of the most significant oil chokepoints in the world. Natural gas prices have risen due to Israel ceasing operations at an offshore production facility within the missile range of Gaza and a mysterious breach in a Baltic pipeline, which Estonian officials believe resulted from external influence.

CHX, a global provider of chemistry solutions, engineered equipment, and technologies to oil and gas companies worldwide, with an impressive market cap of over $6 billion, recently disclosed its third fiscal quarter results that ended on September 30, 2023.

For the quarter, its revenue stood at $939.78 million. Its net income attributable to CHX increased 236.9% year-over-year to $77.71 million, while adjusted EBITDA was $189.54 million, up 14.1% from the prior-year quarter.

Through its regular cash dividend of $17 million and $68 million of CHX’s share repurchases, it returned 52% of cash from operating activities and 74% of its FCF in the third quarter to the shareholders.

CHX expects its production-centric business portfolio, cost-reduction strategies, and digital innovation will yield financial growth. Encouragingly, progression is likely to continue within the international and offshore businesses.

Looking to the fourth quarter, CHX projects revenue between $930 million and $970 million and adjusted EBITDA between $187 million and $197 million. CHX's cash generation remains robust, demonstrating its intent to convert at least 50% of its adjusted EBITDA into free cash flow for the full year and reaffirming its commitment to distribute a minimum of 60% of said cash flow to the shareholders for the year.

Analysts expect CHX’s EPS for the fiscal fourth quarter ending December 2023 to increase 16.1% year-over-year to $0.50, while its revenue for the quarter is expected to come at $979.99 million. It surpassed the consensus EPS estimates in three of the trailing four quarters.

Dundee Precious Metals Inc. (DPMLF)

During periods of instability, as exemplified by the recent outbreak of the Israel-Hamas conflict, gold prices traditionally rise, affirming its reputation as a safe-haven asset. But these geopolitical-instigated spikes tend to be fleeting. Adrian Day Asset Management President, said, "Geopolitical rallies in gold tend not to last long. In the longer term, monetary factors are more important for the gold price."

Amid the economic slowdown by the Fed’s continual interest rate hikes since 2022, gold stocks have emerged as particularly enticing in 2023. Instability in emerging market currencies coupled with an ascendant U.S. dollar has illuminated further investment opportunities, specifically within undervalued gold stocks – for individuals seeking to diversify their portfolios and capitalize on gold's long-term potential.

Canadian-based gold production company DPMLF, with operations in two Bulgarian mines and one Namibian mine, continues to intrigue equity investors despite the steady market prices of gold that have led to stagnant growth revenues.

The company’s impressive free cash flow generation, reaching $70.5 million and $135.5 million in the second quarter and the first half of 2023, respectively, expunges concerns regarding its growth trajectories. The substantial increase in FCF primarily resulted from higher earnings realized and strategic scheduling of cash outflows towards sustaining capital expenditures.

Share performance further corroborates DPMLF's appeal. DPMLF’s shares have outperformed many gold-mining entities, having appreciated over 30% year-to-date. Despite the rally, the overall valuation remains attractive. DPMLF’s forward EV/Sales of 0.96x is 31.2% lower than the industry average of 1.40x, while its forward EV/EBITDA of 2.03x is 72.3% lower than the industry average of 7.32x.

Although DPMLF’s Return on Equity (ROE) languishes slightly below the industry average, remarkable net income growth of 115.7% and 32.2% over the past three and five years, respectively, suggests robust growth. With a payout ratio of 36%, it signals the retention of approximately 64% of its profits for reinvestment and ensuing growth.

Indeed, the significant expansion in earnings testifies to the wisdom of the company's strategy, even when considering the less-than-stellar ROE. Further supporting these prospects, recent analyst forecasts predict DPMLF’s revenue to increase by 16.1% year-over-year to $149.30 million for the fiscal third quarter ending September 2023.