Rising crude oil demand and constrained supply are anticipated to trigger a crude oil price surge. This situation is expected to invigorate investor activity within the energy sector, particularly around companies that are well-positioned to profit.
In this article, I have evaluated energy stocks Exxon Mobil Corporation (XOM) and Baker Hughes Company (BKR) to identify the better investment to capitalize on the sector’s tailwinds. A fundamental comparison of the two stocks makes me believe that BKR has more upside potential than XOM.
For the fiscal fourth quarter ending December 2023, BKR’s revenue and EPS are expected to increase 17.6% and 26% year-over-year to $6.94 billion and $0.48, respectively, while XOM’s revenue and EPS are expected to decline 5.4% and 35.4% year-over-year to $90.27 billion and $2.20, respectively. In addition to these favorable projections, I have discussed several other factors that could help BKR perform better.
However, before comparing these stocks fundamentally and identifying the key differentiators, let’s see what’s shaping the energy industry’s prospects.
While there is a clear shift toward greener energy sources, oil and gas demand shows no signs of abating soon. Predictive estimates even suggest a growing hunger for these fossil fuels.
OPEC projects oil demand to surge by 2.5 million barrels per day (bpd) in 2023, an increase of 100,000 bpd from its former report. By 2024, global oil demand could swell by another 2.25 million bpd.
Geopolitical tensions, such as the Russia-Ukraine impasse and the Israel-Hamas conflict, add a layer of oil price volatility. Rising conflict in the Middle East may trigger further oil price increases, as suggested by the World Bank.
The recent oil spill into the Gulf of Mexico and supply cuts initiated by Saudi Arabia and Russia could potentially drive oil prices even higher. Barclays said, “We have maintained that OPEC+ are likely to maintain a relatively aggressive stance in managing market expectations and…we will not be surprised to see the voluntary reductions being extended into next year.”
In terms of price performance, BKR has gained 16.3% over the past year, whereas XOM has lost 6.8%. Moreover, over the past six months, BKR has gained 20.2% to close the last trading session at $33.87, while XOM plunged 1.7% to close the last trading session at $104.50.
Here are some reasons why BKR could outperform XOM in the upcoming quarter:
On October 04, BKR announced that it had secured a significant contract from ADNOC Gas to provide two electric liquefaction systems (e-LNG) for the Ruwais LNG project in the UAE. The award is expected to be booked in the fourth quarter of 2023 and was announced at this year’s ADIPEC, a globally esteemed energy industry event.
The contract underpins the rising demand trend witnessed throughout the year for BKR’s gas technology equipment suite, highlighted by a series of major LNG orders.
On November 14, XOM started production at Payara, Guyana’s third offshore oil development on the Stabroek Block. This accomplishment elevates the total production capacity in Guyana to approximately 620,000 barrels per day, capacitating a critical contribution towards addressing the mounting global energy demand.
On November 13, XOM initiated lithium drilling operations in Arkansas. This venture signifies the company’s aspiration to cement itself as a key lithium supplier for EV battery producers in the U.S. by 2030. This strategic move aligns with the burgeoning emphasis on innovative technologies to boost the global production of the ultralight metal.
Recent Financial Results
BKR’s revenue increased 23.7% year-over-year to $6.64 billion in the fiscal third quarter that ended September 30, 2023. Its adjusted operating income stood at $716 million, up 42.3% from the year-ago quarter.
Adjusted net income (non-GAAP) and adjusted EPS (non-GAAP) stood at $427 million and $0.42 per share, representing 61.7% and 61.5% improvements year-over-year. Also, the company’s adjusted EBITDA increased 29.7% year-over-year to $983 million. Its free cash flow (non-GAAP) stood at $592 million, up 42% year-over-year.
For the fiscal third quarter that ended September 30, 2023, XOM’s total revenues and other income stood at $90.76 billion, down 19% year-over-year. Net income attributable to XOM and earnings per common share declined 53.9% and 49% from the year-ago values to $9.07 billion and $2.27, respectively.
For the nine months that ended September 30, 2023, XOM’s cash and cash equivalents increased 8.2% year-over-year to $32.97 billion. As of September 30, 2023, the company’s total current assets stood at $101.14 billion, compared to $97.63 billion as of December 31, 2022.
Past and Expected Financial Performance
BKR’s revenue has grown at 4.5% and 1.9% CAGRs over the past three and five years, while XOM’s revenue has grown at 21.4% and 8.9% CAGRs over the same periods, respectively. However, BKR’s tangible book value grew 58.4% CAGR over the past three years, while XOM’s grew at a 4% CAGR.
For the fiscal years ending December 2023 and December 2024, BKR’s revenue is expected to increase 20.8% and 10.1% year-over-year to $25.56 billion and $28.14 billion, respectively.
For the fiscal years 2023 and 2024, Street expects its EPS to come at $1.58 and $2.07, up 75.2% and 31.5% year-over-year, respectively. The company surpassed revenue and EPS estimates in three of the trailing four quarters, which is impressive.
XOM’s revenue and EPS for the fiscal year ending December 2023 are expected to decline 14.9% and 33.5% year-over-year to $352.08 billion and $9.34, respectively. However, for the fiscal year ending December 2024, revenue and EPS are expected to increase 1.4% and 0.4% year-over-year to $356.98 billion and $9.38, respectively.
However, XOM failed to surpass consensus revenue estimates in three of the trailing four quarters.
BKR’s trailing-12-month levered FCF margin is 11.27% compared to XOM’s 5.90%. However, BKR’s 0.71x asset turnover ratio compares with XOM’s 0.94x.
BKR has an overall rating of B, which equates to a Buy in our POWR Ratings system. On the other hand, XOM has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. BKR’s Sentiment grade of B is in sync with favorable analyst estimates, while XOM’s Sentiment grade of D is evident from its poor analyst estimates.
Furthermore, BKR has an A grade for Growth, in sync with its robust financials. Conversely, XOM’s D grade for Growth is justified by its widening losses.
Within the Energy – Oil & Gas industry, BKR is ranked #11, while XOM is ranked #45 out of 85 stocks.
The energy sector is poised to remain resilient, fueled by robust demand for oil and gas. This upward trend presents attractive opportunities for industry players BKR and XOM.
However, with BKR demonstrating a solid profitability outlook, sturdy financials, and encouraging bottom-line forecasts, it appears to be the more advantageous pick now.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy or Buy. View all the top-rated stocks in the Energy – Oil & Gas industry here.
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XOM shares fell $0.49 (-0.47%) in premarket trading Tuesday. Year-to-date, XOM has declined -2.49%, versus a 19.79% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors. More...
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