The trade war with China is waging on, with the latest escalation coming on September 1 as the U.S. began imposing 15% tariffs on some Chinese goods. On the same day, China started targeting U.S. crude with a 5% tariff being placed on oil imports. Following the escalation, the Crude Oil WTI Futures fell 0.15% to $55.02 by 7:24 AM ET on September 2.
"Economic uncertainty will continue to dominate the oil market’s agenda as new U.S. and China trade measures come into effect," said head of commodity markets strategy at BNP Paribas SA Harry Tchilinguirian.
With this in mind, investors have expressed concerns as to whether 3 of the largest players in the space will be able to survive the latest round of tariffs in the ongoing trade war.
Let’s take a closer look to see if analysts believe these 3 oil giants can emerge from this trade war escalation unscathed.
Chevron Corporation (CVX)
With shares down almost 3% in the month following its August 2 Q2 earnings release, investors are worried that the situation won’t improve thanks to the new tariffs.
However, one analyst argues that Chevron’s commitment to improving key areas of its business will keep it on the path towards long-term growth. After hosting investor meetings with CFO Pierre Breber, Cowen & Co. analyst Jason Gabelman believes CVX has made substantial progress in its efforts to improve its return on capital employed (ROCE) with its plan to increase activity in the Permian basin. This is on top of the 5% to 8% year-over-year ROCE improvement it already saw in 2018.
CVX has also taken steps to reduce execution and financial risk by limiting simultaneous major capital projects.
Gabelman adds that Chevron’s approach to corporate responsibility makes it an attractive buy. “On environmental, social and governance (ESG), Mr. Breber highlighted a tension between managing fiduciary duty with societal responsibility. The company will not invest in a business where it does not have a competitive advantage, but understands it needs to be part of the energy future and is taking other steps such as reducing methane emissions,” the analyst explained.
Based on all of the above factors, the analyst reiterated his Buy rating and $140 price target on August 30. Gabelman thinks share prices could surge 19% over the next twelve months.
All in all, the Street agrees with Gabelman. CVX boasts a ‘Moderate Buy’ analyst consensus and a $143 average price target, suggesting 21% upside potential.
Exxon Mobil Corporation (XOM)
Since its August 2 Q2 earnings release, Exxon has been faring even worse than Chevron with shares falling about 5% in the last month. In spite of this, a few analysts say this oil stock is worth the risk.
Exxon is one of the largest energy companies in the world with a market cap of $290 billion. It also doesn’t hurt that it sports a strong balance sheet, with long-term debt at less than 10% of the capital structure and has a 5% yield which falls at high end of the company's historical range.
The company has a diverse product pipeline that includes upstream (drilling), midstream (pipeline) and downstream (refining and chemicals). To expand this even more, XOM plans to spend $35 billion per year on various growth projects through 2025.
Management claims these efforts are already paying off. “We continue to make significant progress toward delivering our long-term growth plans. Our new U.S. Gulf Coast steam cracker is exceeding design capacity by 10 percent, less than a year after startup,” CEO Darren Woods stated.
Some members of the Street have cited the weakness in its downstream and chemicals segments as a cause for concern. In Q2, income generated by both fell well below consensus estimates.
That being said, Merrill Lynch analyst Doug Leggate stated that Exxon still has a lot to brag about. “Exxon clearly faced headwinds throughout the first half of 2019, but we believe it is a top pick within the major oil group based on its attractive valuation versus the stock's fair value of $100 per share, a dividend yield of 4.5% affords investors to wait and a growth story that's now starting to play out,” he explained. As a result, Leggate reiterated his Buy rating and $100 price target on August 5. The analyst’s price target indicates share prices can soar 46% in the next twelve months.
In general, Wall Street is less bullish on this oil stock. XOM has a ‘Hold’ analyst consensus as well as an $81 average price target, implying 18% upside potential.
BP plc (BP)
The last oil stock on our list is also down in the month following its Q2 earnings release on July 30. In the last month, shares have fallen almost 4%. However, analysts still believe that there’s plenty of upside to be had, with BP boasting more double that of CVX and XOM.
According to management, BP is “right on target” at the midpoint of its five year growth plan. The company was able to post an underlying replacement cost profit, a proxy for net profit, of $2.8 billion, compared to the $2.5 billion consensus estimate. The beat was driven by solid upstream production of 2,625K Boep/d (not including Rosneft production of 1,127 K Boep/d), up 6.5% from the year-ago quarter.
Adding to the good news, BP is expanding its products to include more sustainable forms of energy. The company is making large investments into renewable energy and has even agreed to pay incentives for 36,000 employees to further reduce its operational emissions.
As part of its efforts to explore other opportunities, BP announced that it had sold its Alaska operations to Hilcorp Energy Co. for $5.6 billion on August 29, allowing it to increase its focus on shale.
Based on all of these positive developments, BMO Capital analyst Daniel Boyd initiated his BP coverage with a Buy and set a $53 price target on August 20. He thinks the stock price could rise 44% over the next twelve months.
BP boasts a ‘Moderate Buy’ analyst consensus as well as a $53 average price target, implying 43% upside.