Falling Oil Prices Could Pressure Energy Stocks Lower

NEW YORK (TheStreet) -- U.S. energy stocks continue to lag the broader market as oil prices rapidly decline.

The Energy Select Sector SPDR (XLE) has underperformed the SPDR S&P 500 (SPY)  since June, the last time Brent crude oil prices were greater than $115.

The energy ETF is most heavily weighted by Exxon Mobil (XOM) , Chevron  (CVX) , Schlumberger (SLB) , ConocoPhillips (COP)  and EOG Resources (EOG) .

Brent crude oil prices are sliding toward two-year lows as geopolitical concerns have slightly diminished and more supply enters the market.

On Monday, Kurdish forces took over the Mosul Dam, Iraq's largest dam, from Islamic State militants. The Kurdish forces received air support from the U.S. and reversed gains made by the Sunni-Muslim insurgents in the north via the capture of the dam.

Iraq is the second-largest oil producer in the Organization of Petroleum Exporting Countries, and conflict in the region has been a major factor in the dramatic rise of the price Brent crude oil over the past few months.

Analysts say that the Kurd's ability to capture the dam is an indicator of growing strength that will help them take back the oil fields as well.

Falling geopolitical risks this week also come alongside increased production in Libya. Libya's production had been disrupted for months by strikes and protests, but showed an increase to 535,000 barrels per day on Sunday. The acceleration was above previous reports, but still far below the 1.4 million bpd pumped last year.

Collectively, however, increased supply and decreasing risks in Iraq have pressured Brent crude oil prices to yearly lows, and prices could fall to less than $100 for the first time since last July if the trend continues.

Courtesy of StockCharts.com

U.S. integrated energy companies have been adversely affected by falling oil prices as lower prices lead to less revenue. Energy is a relatively inelastic product across the world, meaning that consumption is necessary regardless of the price. When prices fall, however, revenues fall as the price per gallon declines.

I wrote in July that the spike in oil prices led to the spike in energy stocks, and energy stocks would soon fall as Brent crude oil prices rarely spend a considerable time above $115.

The chart below highlights that the correlation has held steady. Both Brent oil prices and the strength of the energy ETF, relative to the S&P 500, peaked at the end of June as geopolitical tensions were at their greatest.

Since June, Brent oil prices have declined more than 10%, indicating the commodity is officially in correction territory. The energy sector ETF has only declined by 6% but has been unattractive relative to competing U.S. equity sectors.

 

Courtesy of StockCharts.com

The energy sector ETF looks to have stabilized near the $95 levels but remains a hold recommendation as the sector isn't necessarily at cheap valuations while oil prices continue to fall.

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Now let's look at TheStreet Ratings' take on some of these stocks.

TheStreet Ratings team rates EXXON MOBIL CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate EXXON MOBIL CORP (XOM) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, increase in stock price during the past year, attractive valuation levels, good cash flow from operations and increase in net income. We feel these strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • XOM's revenue growth has slightly outpaced the industry average of 2.6%. Since the same quarter one year prior, revenues slightly increased by 2.9%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Compared to where it was a year ago today, the stock is now trading at a higher level, reflecting both the market's overall trend during that period and the fact that the company's earnings growth has been robust. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Oil, Gas & Consumable Fuels industry average. The net income increased by 28.0% when compared to the same quarter one year prior, rising from $6,860.00 million to $8,780.00 million.
  • Net operating cash flow has increased to $10,202.00 million or 32.78% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -6.58%.

TheStreet Ratings team rates CHEVRON CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate CHEVRON CORP (CVX) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, attractive valuation levels, largely solid financial position with reasonable debt levels by most measures, increase in net income and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • CVX's revenue growth has slightly outpaced the industry average of 2.6%. Since the same quarter one year prior, revenues slightly increased by 0.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500, but is less than that of the Oil, Gas & Consumable Fuels industry average. The net income increased by 5.6% when compared to the same quarter one year prior, going from $5,365.00 million to $5,665.00 million.
  • CVX's debt-to-equity ratio is very low at 0.15 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.99 is somewhat weak and could be cause for future problems.
  • In its most recent trading session, CVX has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.

At the time of publication, the author held no positions in any of the stocks mentioned. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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