Exxon vs. BP: Which Oil & Gas Giant Should You Buy on the Dip?

Exxon Mobil Corporation (XOM) in Irving, Tex., explores and produces crude oil and natural gas in the United States and internationally. It operates through Upstream; Downstream; and Chemical segments. In comparison, London-based BP p.l.c. ADR (BP) is in the energy business worldwide. It operates through Gas & Low Carbon Energy; Oil Production & Operations; Customers & Products; and Rosneft segments.

U.S. gasoline consumption averaged 8.6 million b/d in the first half of 2021, up from 8.3 million b/d in the second half of 2020, driven by a solid economic recovery and increasing societal mobility. Despite the resurgence of the COVID-19 cases, EIA forecasts U.S. gasoline consumption will average 8.8 million b/d in 2021, up from 8.0 million b/d in 2020. The organization expects this trend to continue next year. Thus, major players in the oil & gas industry, BP and XOM, are expected to benefit.

BP shares have declined 3.8% in price over the past six months, while XOM has declined 0.5%. Also, BP’s 6.3% decline over the past three months compares with XOM’s 4.8% slump. However, in terms of past year’s performance, XOM has gained 35.7% while BP gained 13.9%.

But which stock is a better buy now? Let’s find out.

Recent Developments

On August 5, BP announced memoranda of understanding (MoU) with a series of new potential customers for its proposed clean hydrogen production facility in Teesside in Northeast England. These agreements should support and accelerate the development of its hydrogen facility and allow the company to emerge as a significant player in this space.

On July 26, XOM, together with SABIC, announced that their joint venture, Gulf Coast Growth Ventures, located near Corpus Christi, Tex., had reached mechanical completion of a monoethylene glycol unit and two polyethylene units. The company expects the project startup to begin in the fourth quarter of 2021. This should enhance  XOM’s growth in the near term.

Recent Financial Results

BP’s total revenues increased 81% year-over-year to $37.60 billion in its fiscal second quarter, ended June 30. Its profit for the period grew 119.1% from its year-ago value to $3.35 billion. The company’s EPS per ADS increased 118.4% year-over-year to $0.92. Also, its net cash provided by operating activities rose 44.8% year-over-year to $5.41 billion.

XOM’s revenues increased 107.8% year-over-year to $67.74 billion in its fiscal second quarter, ended June 30. Its earnings increased 534.3% year-over-year to $4.69 billion. The company’s EPS improved 523.1% year-over-year to $1.10. Its cash flow from operating activities stood at $9.65 billion.

Past and Expected Financial Performance

BP’s revenue has grown at a 0.9% CAGR over the past five years, while its levered FCF grew at a 31.3% CAGR over the past three years. Analysts expect BP’s revenue to increase 3.3% in the next year. The company’s EPS is expected to grow 2,700% in the current quarter, 290.5% in the current year, and 6.2% in the next year.

In comparison, XOM’s revenue has grown  at a 0.9% CAGR over the past five years, while its levered FCF grew at a 9,2% CAGR over the past three years. Analysts expect XOM’s revenue to decline 0.6% in the next year. XOM’s EPS is expected to grow 855.6% in the current quarter, 1,390.9% in the current year, and 14.1% in the next year.

Profitability

BP is more profitable, with a levered FCF margin and net income margin of 8.54% and 4.38%, respectively, compared to XOM’s 6.34% and negative 6.17%. Furthermore, BP’s 10.72% ROE compares with XOM’s negative 7.79%.

Thus, BP is more profitable here.

Valuation

In terms of forward EV/Sales, XOM is currently trading at 1.08x, which is 28.7% higher than BP, which is currently trading at 0.77x. Also, XOM’s 6.19 forward EV/EBITDA ratio is 32.5% higher than BP’s 4.18.

Thus, BP is a relatively affordable stock here.

POWR Ratings

BP has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. XOM, in contrast,  has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

BP has a B grade for Growth. This is justified because the company’s revenues and EPS rose 81% and 118.4% year-over-year, respectively, in its  fiscal second quarter. In comparison,  XOM has an A grade for Growth because  its revenues and EPS increased 107.8% and 534.3%, respectively, in the last quarter.

BP has a C grade for Value, while XOM has a D grade for Value. This is justified because BP’s 7.63 forward non-GAAP P/E ratio is 25.8% lower than the 10.28 industry average. In contrast,  XOM’s 12.93 forward non-GAAP P/E multiple  is 25.8% higher than its industry average, consistent with its grade.

Of the 91 stocks in the Energy - Oil & Gas industry, XOM is ranked #57. On the other hand, among the 48 stocks in the Foreign Oil & Gas industry, BP is ranked #20.

Beyond what we’ve stated above, we have also rated the stocks for Growth, Momentum, Sentiment, and Quality. Click here to view BP ratings. Also, get all XOM ratings here.

The Winner

Both BP and XOM are well-established players in the oil & gas industry and are expected to bounce back from the dip, driven by continuing demand. However, we think higher profit margins and reasonable valuation make BP the better buy here.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Energy - Oil & Gas industry here. Also, here to view the top-rated stocks in the Foreign Oil & Gas industry.

XOM shares fell $0.01 (-0.02%) in after-hours trading Thursday. Year-to-date, XOM has gained 39.02%, versus a 20.14% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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