The energy sector is the lifeblood of the economy, powering the operation of businesses. Over the past year, energy stocks have experienced roller-coaster-like fluctuations, underperforming the broader market. Factors such as the slowdown in China’s economic growth have suppressed demand, and as energy prices stabilize, profit margins have also narrowed. Given the weak performance of energy stocks, this presents an excellent opportunity for investors to buy into the energy sector. Here are two stocks currently worth considering.
ExxonMobil (XOM) and Chevron (CVX) are the two largest integrated oil and gas companies in the United States today. These companies are attractive because their businesses span the oil and gas supply chain, including exploration and production, transportation, refining, and processing crude oil into refined products such as gasoline, diesel, and petrochemicals.
This diversification across the supply chain helps stabilize the operations of these two companies in the volatile energy industry. When oil prices rise, exploration and production perform well; when prices fall, transportation and refining operations help mitigate the impact of oil and gas price fluctuations.
This integrated business model is also why Chevron and ExxonMobil have increased their dividend payments for 38 and 42 consecutive years, respectively.
Despite former President Trump’s encouragement to increase drilling, oil and gas companies have been cautious about capital project spending to boost production. In the mid-2010s, many companies significantly increased capital expenditures. These expenditures, along with improvements in drilling technology, enabled U.S. companies to dramatically increase oil production but also led to a collapse in oil prices.
ExxonMobil and Chevron used the windfall profits from high oil prices a few years ago to pay down debt and strengthen their balance sheets. During the pandemic, their long-term debt peaked at $66 billion and $44 billion, respectively. Since then, the two companies have repaid 43% and 45% of their debt.
ExxonMobil and Chevron offer investors attractive dividends, with yields of 3.5% and 4.1%, respectively. Both companies are in much better financial shape now than at the beginning of the pandemic. With forward price-to-earnings ratios of around 12 times, both stocks are reasonably priced and are expected to continue rewarding shareholders in the future.
