Latest News

Exxon Gets an Upgrade to Buy, but Analyst Takes ‘Chips Off Table’ for 2 Other Oil Stocks

0
Text size

Gas prices are displayed on a pump at an Exxon gas station in Washington, DC, on May 24, 2022.

Stefani Reynolds / AFP via Getty Images

Energy stocks have emerged winners in this period of volatility and historically high inflation, reporting record profits and boosting shareholder returns as oil prices have surged.

But all good things must come to an end, and for investors the key question is when to start retreating. For Evercore ISI analyst Stephen Richardson, that time may be nearing.

“Cyclical investors are always mindful of a peak (in any form) and apparent from our bottom’s up work is how industry margins are set to compress from here without further commodity support,” he wrote in a research note Tuesday.

The backdrop for energy stocks remains solid, Richardson added, but the industry will soon have to navigate higher operating costs, capital expenditure inflation, cash taxes, and the eventual deflation of gas prices — and investors should be prepared.

In his view,


Exxon Mobil

(ticker:


XOM

) is a good bet to play as the macroeconomic environment shifts toward these trends. The analyst upgraded the stock to Outperform from In-Line, and raised his price target to $120 from $88. Richardson’s upgrade stems from what he sees as a discounted valuation compared to historical levels, as well as sustainable long-term earnings growth fueled by a diversified portfolio and cost reductions. Short-term catalysts include upwards revisions to earnings estimates and record-defining margins.

But while Richardson is all in on Exxon, he’s “taking some chips off the table” for


Devon Energy

(


DVN

) and


Occidental Petroleum

(


OXY

). The analyst downgraded both stocks to In-Line from Outperform, citing concerns over slowing cash distribution momentum and free cash flow.

“We have no fundamental issues with DVN and/or OXY but acknowledge that just about everything that could go right for these names over the last 12 months did, and our Bull case theses have largely played out,” he wrote.

He maintained his price targets for Devon and Occidental at $80 and $74, respectively. The analyst acknowledged his call could be “overly cautious and early,” but added he would rather be early than late.

Exxon stock was up 3% to $101.88 on Tuesday, while Devon was gaining 0.7% to $77.60 and Occidental was down 0.3% to $69.38.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

Jim Cramer Says Buy Any Dip in Oil Stocks; Here Are 3 Names Analysts Like

Previous article

Fund legend Peter Lynch combined 2 investing styles to earn 29% per year from ⁠1977 to 1990 — here’s how you can apply the same market-trouncing technique today

Next article

You may also like

Comments

Leave a reply

Your email address will not be published.

More in Latest News