After a very challenging 2020, energy stocks have made a strong comeback in 2021. In fact, the Energy Select Sector SPDR ETF (XLE) has gained more than 50% year to date (YTD), compared to the S&P 500 gains of 22.5% in this period.
A key driver of this outperformance is the rising prices of crude oil. This week, oil prices hit 7-year highs and Goldman Sachs increased its price target for oil to $110 per barrel.
Given these factors, let’s see which oil stock between Exxon Mobil (XOM) and Petroleo Brasileiro (PBR) is a better buy at current price levels.
The bull case for Exxon Mobil
One of the largest companies in the world, Exxon Mobil is valued at a market cap of $272 billion and an enterprise value of $324 billion. It explores and produces crude oil and natural gas while operating through Upstream, Downstream and Chemical business segments. Exxon also transports crude oil, natural gas, petroleum products as well as petrochemicals. At the end of 2020, it had 22,239 net operated wells with proved reserves.
Despite its stellar returns in the last year, XOM stock has returned just 17% to investors in dividend-adjusted returns in the past decade, compared to the S&P 500 returns of more than 330%. But past returns should not matter to current investors especially since the International Energy Agency expects global demand for oil to rise from 96.5 million barrels each day in 2021 to 104.1 million barrels each day in 2026.
However, Exxon Mobil and peers also face macroeconomic risks given the world is shifting towards clean energy solutions and this is a long-term trend. The demand for oil might decelerate by the end of the current decade which suggests Exxon Mobil will have to expand its portfolio of capital-intensive assets over time.
Wall Street expects Exxon Mobil to improve earnings to $4.69 per share in 2021 and $5.52 per share in 2022 compared to a loss of $0.33 per share in 2020. This will enable the company to maintain and even increase its dividends per share that currently yields a tasty 5.3% to investors.
The bull case for Petroleo Brasileiro
Petroleo produces and sells oil and gas in Brazil and other international markets. In the last 10 years, PBR has also underperformed the markets by a wide margin as shares are down 50% since October 2011.
In Q2 of 2021, its revenue more than doubled to $21 billion while its net income rose to $8.1 billion, compared to a loss of $417 million in the year-ago period. PBR also doubled its export revenue to $6.4 billion while its capital expenditures stood at $2.4 billion. PBR confirmed a majority of CAPEX was deployed towards capacity expansion which is bound to drive cash flows and earnings higher going forward.
In the June quarter, PBR’s cash rose over 200% to $9.3 billion as it ended Q2 with almost $10 billion in cash. The company also paid down debt worth $27.5 billion and is on track to achieve a gross debt target of $60 billion in the next few months.
The verdict
We can see that PBR and Exxon Mobil are cyclical stocks part of a capital-intensive industry. If oil prices continue to move higher, both of these should benefit. However, I believe Exxon Mobil’s wider economic moat and diversified base of assets make the energy giant a better bet compared to Petroleo at current prices.
XOM shares were trading at $64.67 per share on Friday afternoon, up $0.36 (+0.56%). Year-to-date, XOM has gained 64.33%, versus a 23.92% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.
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