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BP and Shell vs. Exxon and Chevron: The Mystery of Big Oil's P/E Gap -- Barrons.com

Barron's · 01/06/2023 19:43
By Brian Swint

Last year, global oil companies boomed. BP and Shell, both based in London, saw share prices rise some 40% in 2022 and trade at five times forward earnings. U.S.-based Exxon Mobil soared nearly 80% and trades at almost 10 times earnings, while Chevron rose 50% and trades at 11 times.

Why that gap? Many blame windfall-profit taxes. All of the oil giants feasted on rising oil prices after Russia invaded Ukraine. While prices have fallen, they're still at levels that produce sizable profits. However, European governments are clawing back some of those gains by taxing oil producers to subsidize high energy costs for consumers.

Still, taxes don't fully explain the gap. All global producers are taxed in Europe. Exxon recently sued the European Union over the plan. And analysts discount the impact of the tax, which kicks in at high revenue levels.

Deutsche Bank analyst James Hubbard estimates that sector earnings will be cut by "low-single digits."

Adds Morningstar strategist Allen Good: "2023 earnings won't match 2022, but they're still great. Shareholders are going to see a lot of cash flow coming back between [share] repurchases and dividends."

A bigger factor is sustainable-energy investments. All four have targeted 2050 for reaching carbon net zero. But BP and Shell are investing about $1 billion a year each in low-carbon energy, and say their oil-and-gas production has peaked. Exxon and Chevron spend less as a percentage on green projects, and expect fossil-fuel output to rise. Meanwhile, environmental, social, and governance investors avoid BP and Shell because they remain big fossil-fuel producers.

In time, that may change. For now, BP and Shell look like bargains.

Next Week

Monday 1/9

The Federal Reserve reports consumer credit data for November. In October, total consumer debt increased at a seasonally adjusted annual rate of 6.9% to a record $4.73 trillion. Revolving credit, which is mostly credit-card debt, jumped 10.4% as more consumers tap credit to pay for living expenses.

Tuesday 1/10

The National Federation of Independent Business releases its Small Business Optimism Index for December. Consensus estimate is for a 91.5 reading, roughly even with the November data. The index remains mired near eight-year lows from last summer as small-business owners continue to cite inflation as their No. 1 issue.

Wednesday 1/11

The Mortgage Bankers Association releases its Market Composite Index, a measure of mortgage loan application volume, for the week ending on Jan. 6. Mortgage activity declined sharply in the second half of last year as interest rates surged. In October, mortgage activity hit a 25-year low.

Thursday 1/12

The Department of Labor reports initial jobless claims for the week ending on Jan. 7. In December, jobless claims averaged 217,500, still low historically. Despite the many announcements of layoffs in the tech and real estate sectors, the job market remains tight, as the Bureau of Labor Statistics this past week reported the unemployment rate edging down to 3.5%, near a half-century low. The U.S. economy added 4.5 million jobs last year, or about 375,000 a month on average. The second half of 2022 did see a slowing of job growth from the first half's blistering pace but nothing that portends a recession in 2023, which the majority of economists are forecasting.

The BLS releases the consumer price index for December. Economists forecast a 6.5% year-over-year increase, after a 7.1% jump in November. The core CPI, which excludes volatile food and energy prices, is expected to rise 5.7%, slightly slower than the 6% rate of growth previously. The CPI peaked at 9.1% in June of 2022, while the core CPI hit its top at 6.6% in September. The past two CPI reports have seen a sharp deceleration in inflation, but the Federal Open Market Committee has stressed that it needs to see many months of data before even considering an end to its interest-rate hiking campaign.

Friday 1/13

Earnings season kicks off with the four largest U.S. banks announcing quarterly results. Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo all report before the market open.

Bank of New York Mellon, BlackRock, Delta Air Lines, First Republic Bank, and UnitedHealth Group release earnings.

The University of Michigan releases its Consumer Sentiment index for January. The consensus call is for a 60.5 reading, about one point more than previously. In December, consumer expectations for the year-ahead inflation hit an 18-month low of 4.4%.

Write to Brian Swint at brian.swint@barrons.com

(END) Dow Jones Newswires

January 06, 2023 19:43 ET (00:43 GMT)

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