3 oil stocks to sell at the start of the second quarter
- Chevron Corporation (CLC): A solid balance sheet and assets with a low break-even point. Valuations look stretched and investors may consider buying on dips.
- Exxon Mobil (XOM): the upstream remains the cash cow. Any drop in Brent below $100 a barrel will trigger a correction.
- Hess Company (IT IS): Annual free cash flow likely to increase to $3 billion by 2026. Oil breakeven point higher than Chevron and Exxon. Premium valuation warrants some correction.
There have been big moves in oil stocks, with Brent trading above $100 a barrel. For oil companies, this means an expansion of the EBITDA margin and an increase in cash flow. Oil stocks therefore reduced improving fundamentals, potentially higher dividends and the flexibility to make large investments.
Amid the prevalence of good news, investors should remain cautiously optimistic. One of the main reasons is the galloping inflation and the impact of the war on the world economy. There is already predictions of a possible recession in 2023 rising interest rates being another obstacle to growth.
If there is a relative deceleration in global economic activity over the next few quarters, oil should see some correction. In addition, rising rates are likely to curb inflation to some extent. In an inflationary scenario, the energy sector tends to outperform. However, if inflation is kept under control, the tightening of global liquidity will have an impact on the price of oil. It would also involve profit booking in oil stocks.
It should be mentioned here that the prospect of selling oil stocks does not imply a significant weakening of fundamentals. However, it makes sense to book profits and re-enter quality stocks at lower levels. Let’s discuss three oil stocks to sell at the start of the second quarter of 2022:
Oil stocks: Chevron Corporation
Chevron (NYSE:CLC) the stock has surged with returns of 42% since the start of 2022. There is no doubt that the company has a strong balance sheet and a quality asset base.
However, the rally seems overdone in the short term and a correction is imminent. It makes sense to book profits and return to lower levels with Brent back to $100 a barrel.
Of course, Chevron has a low break-even point. The company generated positive operating cash flow even during the first year of the pandemic. An attractive breakeven point makes CVX stock one of the top dividend-paying stocks to consider.
That said, CLC stock is currently trading at an EV/EBITDA of 9.7. The US energy sector currently has an average EV/EBITDA of 7.5. Valuations should approach the sector average, which will imply some correction.
Returning to the long-term perspective, Chevron added 46bboe of resources in the last decade. With strong cash flow, the company has the flexibility to gradually increase production. Assets located in a low geopolitical risk area are an added advantage.
Overall, CVX stock is worth keeping on the investment radar. For now, further exposure can be avoided and profit booking makes sense.
Exxon Mobil (NYSE:XOM) was also among the best performing oil and gas stocks of the current year. Similar to Chevron, XOM also offers investors a healthy dividend yield, which looks sustainable.
However, on the valuation front, there is reason to think of a short-term correction. XOM stock currently trades at an EV/EBITDA of 8.4 compared to the industry average of 7.5. If crude corrects below $100 a barrel, the valuation gap is likely to close on the downside. So I would stay away.
It should be noted that Exxon Mobil is diversified in the downstream and chemical segment. However, the upstream segment remains the cash flow machine. For 2021, the the upstream segment contributed 68% of total operating cash flow. Going forward, the company’s assets in the Permian and Guyana are expected to generate additional cash flow.
In terms of long-term positives, the company has assets at a breakeven point of $41 a barrel. Additionally, a leverage ratio of 21% gives the company great financial flexibility to invest in the core assets and the renewable energy portfolio. Over the next five years, the company plans $15 billion in low-emissions investments.
I would also avoid going on forever Hess Company (NYSE:IT IS) at current levels. Also, positions can be reduced with a correction probably after a big rally. In fact, HES shares are trading at a higher EV/EBITDA than Chevron or Exxon.
Hess also has low breakeven assets. The four company-sanctioned developments in Guyana have a breakeven price of $25 to $35 per barrel. The Guyanese assets are a game-changer for the company with visibility into several million barrels of remaining exploration on the upside. However, the company expects a portfolio break-even point of $45 a barrel by 2026. Even on that front, Chevron and Exxon look relatively attractive.
Of course, on a standalone basis, there’s reason to be optimistic about Hess. Between 2021 and 2026, the company forecast cash flows increase at a CAGR of 25%. By 2026, the company expects annual free cash flow of $3 billion. Given this visibility, dividend growth is likely in the coming years.
Overall, Hess Corporation has attractive assets. The company’s credit metrics will improve over the next few years, even as oil trades in the $70-80/barrel range. The only factor is entering the stock at a lower EV/EBITDA valuation. I believe the opportunity should arise in the coming quarters.
As of the date of publication, Faisal Humayun does not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.