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2 Energy Stocks Wall Street Fell in Love With This Week
This week, Wall Street took a bullish view on two top energy stocks: ExxonMobil (NYSE:XOM) and Devon Energy (NYSE: DVN). Here, two Motley Fool contributors take a closer look at Wall Street sentiment and why these energy stocks are a compelling way to energize investors’ portfolios right now.
ExxonMobil expects profits to increase over the next three years
Scott Levine (ExxonMobil): Oil supermajor ExxonMobil has been the focus of two analysts’ attention this week. On Monday, Mizuho Financial Group raised its price target on ExxonMobil shares to $128 from $125 after updating its multi-year outlook on energy prices. The next day, morgan Stanley turned bullish on ExxonMobil shares, resuming coverage with an overweight rating and assigning a price target of $145. Based on the stock’s closing price of $117.87 on Thursday, the Morgan Stanley’s estimate implies an increase of 23%.
In addition to praising the company’s scale and strong presence across the energy value chain, Morgan Stanley based its price target on the stock’s valuation. ExxonMobil shares currently trade at 14.4 times net income, which represents a discount to the S&P 500P/E of 27.4.
During the presentation of your financial results for the first quarter of 2024, ExxonMobil provided investors with management’s profit forecast for the coming years. If the price of Brent crude oil averages $60 per barrel over the next three years, ExxonMobil projects that net profit will grow at a compound annual growth rate of more than 10% from 2023 to 2027. And it’s not like if the company believed that it needed to achieve some extraordinary expansion in its margins to meet this forecast. Management anticipates achieving this profit target if it generates the same average margins as its various businesses from 2010 to 2019. Additionally, it believes its ability to drive growth at its upstream assets located in Guyana, the Permian Basin and Brazil will contribute significantly to growing financial results over the next three years.
Devon Energy is improving the quality of its assets
Lee Samaha (Devon Energy): A few weeks after raising Devon Energy’s price target to $57, Mizuho did so again, raising the price target again to $61 while maintaining a buy rating on the stock. The latest move comes down to a better outlook on raw material prices and the belief that Devon Energy is one of the companies best placed to profit from it.
Mizuho is right to pick Devon Energy as the winner in the sector due to its attractive valuation. The company’s investment in drilling in its Delaware Basin core is already paying off in 2024. Additionally, the company’s capital allocation strategy makes sense in the current environment.
The story continues
Management considers the stock’s valuation so attractive that it is prioritizing share repurchases rather than raising its variable dividend in 2024. This may disappoint dividend-focused investors, but if you are optimistic about the long-term outlook for oil and to Devon Energy’s ability to produce more of it, so it makes perfect sense to reduce the share count when shares are trading at an attractive free cash flow yield. After all, the result will be that current shareholders will have a more significant claim to cash flows that are likely to increase over time.
As for producing more oil, Devon’s focus on drilling its key assets in the Delaware Basin to improve overall well productivity saw the company surpass production estimates in the first quarter. Additionally, management updated its full-year production forecast to 655,000 barrels of oil equivalent per day (BOE/D) to 675,000 BOE/D from a previous estimate of 650,000 BOE/D. Devon management believes it is on track to improve well productivity by 10% by 2024.
While Devon’s bottom-line earnings and cash flow are led by oil prices, the Wall Street consensus is for the company to generate $3.3 billion in free cash flow (FCF) in 2024. This means it trades less than 10 times estimated FCF in 2024. It is an attractive stock for investors seeking energy exposure.
Should you buy these shares now?
With analysts taking a bullish view on ExxonMobil and Devon Energy this week, it’s not surprising that investors are considering them. Your future prospects are bright.
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Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The motley fool has a disclosure policy.
2 Energy Stocks Wall Street Fell in Love With This Week was originally published by The Motley Fool