For Immediate Release
Chicago, IL – November 18, 2022 – Zacks Equity Research shares Phillips 66 PSX as the Bull of the Day and Hertz Global Holdings, Inc. HTZ as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Occidental Petroleum OXY, Hess Corporation HES and Marathon Oil MRO.
Here is a synopsis of all five stocks.
Bull of the Day:
Phillips 66 is an oil and gas firm that topped our quarterly estimates in early November and boosted its guidance once again for 2022, and more importantly, for fiscal 2023.
Phillips 66 shares have soared in 2022, yet its improved earnings outlook has kept its valuation levels very appealing. Plus, its strong dividend yield is much-needed as investors attempt to find ways to keep pace with inflation. And it said earlier this month that it will return an additional $10 billion to $12 billion to shareholders between mid-year 2022 and the end of 2024.
Phillips 66 Basics
Phillips 66’s diversified energy portfolio includes midstream operations, which generally features the transport and storage of crude oil before it is refined and processed. The company also runs a refining segment that turns crude into everything from fuels for transpiration to lubricants and specialty products such as petroleum coke, solvents, and other products.
On top of its chemicals, refining, and specialties segment, Phillips 66 runs a successful marketing segment. The company operates Phillips 66 branded gas stations and service stations around the U.S. and beyond. Phillips 66 is also making sure it’s prepared for the expansion and likely transition to alternative fuels and energy in the coming decades and beyond.
Phillips 66’s emerging energy efforts include renewable fuels, batteries, carbon capture, and hydrogen. For instance, the company said recently that it’s converting its San Francisco refinery in Rodeo, California into “one of the world’s largest renewable fuels facilities,” with the project set to begin commercial operations in Q1 of 2024.
Recent Growth and Outlook
Phillips 66 and others benefited immensely from rising oil and energy prices amid the huge rebound in demand as the U.S. and economies around the globe soared back to life after the covid crash. Travel, including air, has already mounted a serious comeback and broader energy demand is returning to pre-covid levels. Plus, the ongoing Russian invasion of Ukraine continues to negatively impact oil and gas supplies.
Even though oil prices have come back down from their peaks of over $100 a barrel, they have hovered between roughly $80 and $90 a barrel for the last few months. Phillips 66’s revenue skyrocketed 74% last year, with its adjusted earnings up from a loss of -$0.89 per share to +$5.70 a share.
Phillips 66 has topped our quarterly estimates by an average of 28% in the trailing four quarters, including a 30% third quarter beat on November 1. Management was able to raise their guidance once again for FY22 and fiscal 2023, which is no easy task amid the current environment that’s seen the wider S&P 500 earnings picture fade.
PSX’s four quarter and first quarter FY23 consensus estimates are now up 41% and 49%, respectively over the past 60 days. Phillips 66’s FY22 and FY23 EPS estimates have climbed by 28% and 30%, respectively during this same stretch. Zacks estimates call for its 2022 revenue to soar 47% to $169.32 billion to help boost its adjusted earnings by roughly 270% from under $6 a share all the way to $21.00 per share.
Phillips 66 is currently projected to see its revenue and earnings decline on a YoY basis in 2023 as they come up against nearly impossible to compete against periods. But there is no guarantee that those estimates don’t continue to improve as they have over the last several months.
The so-called lost decade for oil and gas companies forced everyone in the industry to reevaluate every aspect of their business, slimming down operations to run more efficiently than ever. The cost-cutting measures are now paying off in a huge way amid rebounding oil and energy prices. The trimmed down operations will also help Phillips 66 and others keep margins relatively high going forward.
Phillips 66 generated $3.1 billion in cash from operations in the third quarter. This helped the company return $1.2 billion to shareholders through dividends and share repurchases last quarter. Better yet, PSX announced during its investor day on November 9 that it plans to return an additional $10 billion to $12 billion to shareholders between mid-year 2022 and the end of 2024 via buybacks and dividends.
Additionally, Phillips 66 said it will start to roll out sustainable cost reductions of $1 billion through business transformations. With this in mind, Phillips 66’s 3.6% dividend yield blows away its industry’s 2% average, as well as oil and energy titan Exxon Mobil’s (XOM) 3.2%. The company also has a very sustainable 22% dividend payout ratio.
Price and Valuation
PSX shares have climbed 77% in the past two years to lag behind its highly-ranked industry’s 95% but blow away the S&P 500’s 10% gain. More recently, Phillips 66 shares are up 10% in the last six months to hit new 52-week highs on November 14. And its current Zacks consensus price target offers 12% upside to the roughly $108 a share it trades at right now.
On the valuation front, PSX trades at 7.2X forward 12-month earnings. This represents a 30% discount to its own 12-month median. Looking back further, the nearby chart showcases that Phillips 66 trades at a 35% discount to its own decade-long median and roughly in line with the Zacks Oil and Energy sector. And PSX trades not too far above its lows of 5.9X during this stretch.
Phillips 66’s Oil and Gas - Refining and Marketing industry ranks in the top 7% of over 250 Zacks industries. PSX also sports “A” grades for Value, Growth and Momentum in our Style Scores system. Its commitment to boosting its dividend should help investors as they try to fight back against ongoing inflation. And investors looking for value during the current market and economic conditions would do well to consider Phillips 66 or other oil stocks.
Phillips 66’s positive upward earnings revisions help it grab a Zacks Rank #1 (Strong Buy) right now. Plus, the broader oil and gas sector will likely remain a major backbone of economies around the world for decades to come. And let’s remember that Phillips 66 is already preparing for an alternative fuel and energy future.
Bear of the Day:
Hertz Global Holdings, Inc. is a rental car company that reemerged on the public markets after it filed for bankruptcy early in the pandemic. Hertz shares have gone on a wild, volatile ride in 2022 and are currently down 32%. And now Hertz’s earnings outlook is trending in the wrong direction.
Hertz Global operates its namesake Hertz rental car company, as well as Dollar and Thrifty vehicle rental brands throughout North America, Europe, the Caribbean, Latin America, and beyond. The company is back on the public markets after it filed for chapter 11 bankruptcy relatively early in the pandemic in May 2020.
The company’s CFO Kenny Cheung, who took over in September 2020, spoke to the Wall Street Journal earlier this month about how Hertz has been able to change. “The restructuring process we went through during chapter 11 had several long-term benefits for the business,” Cheung told the Wall Street Journal.
“We made structural improvements to the business. This began with our contract mix where we walked away from unprofitable contracts. Then we looked at our segment mix and relocated cars away from unprofitable sectors and into more profitable ones such as the leisure traveler.”
Near Term Setbacks
Hertz has benefitted from a major resurgence in travel. The company had also been the beneficiary of higher used car prices. HTZ and other rental car companies typically sell their vehicles when they reach a certain mileage or age. Those revenues are fading as used car prices start to normalize. Hertz said on its earnings call in late October that “residuals on used cars declined precipitously as Q3 progressed.”
The company was still able to post solid results and it beat our bottom-line estimate for the fourth quarter in a row. And Zacks estimates call for its 2022 revenue to surge 19% to $8.73 billion as the travel market’s resurgence remains in full force. Hertz’s sales are then projected to climb another 4% higher in 2023.
But the firm provided rather downbeat earnings guidance. Hertz’s Zacks consensus earnings estimate for FY22 is down 14% in the last 60 days, with FY23’s outlook 17% lower. With this in mind, its adjusted earnings are projected to fall 15% YoY to $3.71 per share and then slide 35% lower in FY23 to $2.42 per share.
Hertz’s downward earnings revisions help it land a Zack Rank #5 (Strong Sell) right now. And its Transportation – Services industry lands in the bottom 33% of over 250 Zacks industries. Plus, Hertz stock is down 32% in 2022 and it’s been on a rather volatile ride since it began trading again.
Therefore, investors might want to find other opportunities to invest in the travel or transportation industries.
EIA Oil Supply Headlines: Crude Stocks Down, Fuel Up
U.S. oil prices moved down on Nov 16 after government data showed a weekly build in gasoline and distillate supplies. On the New York Mercantile Exchange, WTI crude futures settled at $85.59 a barrel yesterday — the lowest since Oct 25.
Before going into the overall macro environment for oil, let's dig deep into the Energy Information Administration’s ("EIA") Weekly Petroleum Status Report for the week ending Nov 11.
Analyzing the Latest EIA Report
Crude Oil: The federal government’s EIA report revealed that crude inventories fell 5.4 million barrels compared to expectations of a 400,000-barrel decrease per the analysts surveyed by S&P Global Commodity Insights. The combination of a surge in exports, lower imports and higher refinery demand accounted for the big stockpile draw with the world’s biggest oil consumer.
Total domestic stocks now stand at 435.4 million barrels — 0.6% more than the year-ago figure but 4% lower than the five-year average.
The latest report also showed that supplies at the Cushing terminal (the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange) fell 1.6 million barrels to 25.6 million barrels.
Meanwhile, the crude supply cover decreased from 28 days in the previous week to 27.4 days. In the year-ago period, the supply cover was 28.5 days.
Let’s turn to the products now.
Gasoline: Gasoline supplies increased for the first time in five weeks. The 2.2 million-barrel rise was primarily attributable to a pullback in demand. Analysts had forecast that gasoline inventories would fall 800,000 barrels. At 207.9 million barrels, the current stock of the most widely used petroleum product is 1.9% less than the year-earlier level and 5% below the five-year average range.
Distillate: Distillate fuel supplies (including diesel and heating oil) increased after dropping last week. The 1.1 million-barrel gain reflected a fall in demand. Meanwhile, the market looked for a supply draw of some 500,000 barrels. Despite last week’s build, current inventories — at 107.4 million barrels — are 13.2% below the year-ago level and 15% lower than the five-year average.
Refinery Rates: Refinery utilization, at 92.9%, rose 0.8% from the prior week.
Even as fears revolving around high inflation and slowing growth somewhat cloud the outlook for Oil/Energy, it has remained the best S&P 500 sector this year. The space has generated a total return of more than 66% in 2022 against the S&P 500’s loss of around 17%. Apart from a positive fundamental picture, the sector is enjoying support from geopolitical uncertainty amid Russia’s military operations in Ukraine. In March, crude prices surged to multi-year highs of $130 on concerns about supplies from Russia, which is one of the world's largest producers of the commodity.
Oil has pulled back from those lofty levels, with the conflict showing no sign of a quick resolution, the risk of dwindling inventory and the influential oil exporters’ group OPEC agreeing on a production curtailment means that the commodity has got enough reasons to stay elevated in the near-to-medium term.
Consequently, three of the top four gainers of the S&P 500 this year are all energy-related names: Occidental Petroleum, Hess Corporation and Marathon Oil.
Occidental Petroleum: OXY is the top-performing S&P 500 stock in 2022, with a gain of 148%. Occidental Petroleum beat the Zacks Consensus Estimate for earnings in three of the last four quarters. It has a trailing four-quarter earnings surprise of 12.7%, on average.
OXY has a projected earnings growth rate of 289.4% for this year. Occidental Petroleum is valued at around $68 billion.
Hess Corp.: Hess shares have appreciated 98% so far in 2022. HES has a projected earnings growth rate of 231.1% for this year.
Hess, with a market capitalization of $46 billion, enjoys a Zacks Growth Style Score of A. HES beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters, the average being 8.1%.
Marathon Oil: This stock is among the best performers on the S&P 500 Index, with shares having appreciated 92% in 2022. MRO, carrying a Zacks Rank #3 (Hold), has a projected earnings growth rate of 190.5% for this year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Marathon Oil beat the Zacks Consensus Estimate for earnings in each of the last four quarters. MRO has a trailing four-quarter earnings surprise of 13.9%, on average.
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