2018 Oil & Gas Outlook: Why Exxon and Chevron Could Unexpectedly Outshine the Market

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Will 2018 be the year that the energy sector does its part in participating in this raging bull market? The Dow and S&P 500 have risen exponentially from their 2009 panic selling lows, but some investors are growing concerned that the broader bull market is nearing nine years old. The Dow Jones Industrial Average (DJIA) rose 25% and the S&P 500 rose by almost 19.5% in 2017.

Those gains greatly outpaced expectations that were forecast at the start of 2017, but big oil stocks disappointed.

Chevron Corp. (NYSE: CVX) managed to outperform its 2017 expected return of 5.3% with a total return of 6.4%. Exxon Mobil Corp. (NYSE: XOM) was projected to bring a return of just 0.9% in the past year, but the oil and gas giant posted a return of −7.3%.

Wall Street strategists have weighed in on tax reform, broader earnings growth and higher gross domestic product growth and expect to see the stock market to rise again in 2018. 24/7 Wall St. just came out with its annualized forecasting tool showing that DJIA at 26,400 and at least 2,855 on the S&P 500 are the baseline targets for 2018.

For the Dow to make its target in 2018, it seems that Chevron and Exxon Mobil are going to have to do better ahead for their shareholders. After all, the two energy giants have a combined market cap of over $600 billion but still make up just 5.9% of the Dow when you add both of them together.

At $125.19 a share, Chevron started 2018 with a consensus analyst target price of $128.55. With its 3.45% dividend yield in the mix, investors are expecting total return of 6.13% in 2018. Chevron has a 52-week trading range of $102.55 to $127.74 and a market cap of $241.5 billion. Its weighting in the Dow is 3.54%, but the rank is roughly 15th of the S&P 500.

Exxon’s 2018 starting price of $83.64 a share came with a consensus target price of $86.50. If analysts are correct, its return in 2018 after considering the dividend yield of 3.68% would be about 7.10%. Exxon has a 52-week range of $76.05 to $91.15 and a market cap of $360 billion. Its weighting in the Dow is 2.36%, but the rank is roughly 10th of the S&P 500.

The obvious issue to consider is of course where oil prices are heading. That being said, the current consensus with oil having surged north of $61 per barrel is that oil’s trading range might be tighter than over the past year. However, the floor for oil prices is also expected to be higher than what was seen in the past two years. That is good news for Exxon and Chevron. And what if oil surprises on the upside due to economic strength and higher global demand?

A second issue is that Exxon and Chevron have both been able to accomplish better project spending allocations. And the energy sector as a whole has managed to bring down production costs handily during the boom-bust cycle that the sector endured. This means that both oil and gas giants can reap better profits than in the past, even if they have to endure lower oil prices.