This Smaller Energy Stock Can Outshine ExxonMobil: Is it a Buy?
Energy is still a hot sector, with the conflicts in the Middle East continuing to draw attention. ExxonMobil Holdings Corporation XOM, among the favorite Wall Street energy stocks, gained 47.8% over the past year. However, Par Pacific Holdings Inc PARR, a mid-cap stock, outperformed XOM and skyrocketed 143.2% over the same time frame.
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Should investors now focus on PARR instead of XOM? Let’s delve deeper.
High Oil Price to Aid Upstream Operations of XOM
West Texas Intermediate (“WTI”) crude is trading at more than the $85-per-barrel mark. The high price is being backed by ongoing tensions in the Middle East. The U.S. Energy Information Administration (“EIA”) in its latest short-term energy outlook projected WTI at $80.88 per barrel this year, higher than $65.40 last year. A highly favorable pricing environment for the commodity is likely to continue supporting ExxonMobil’s exploration and production activities, which derive the majority of its earnings.
The company has a massive footprint in the Permian, the most prolific oil and gas play in the United States, and offshore Guyana. In the Permian, the integrated giant has been employing new drilling techniques and artificial intelligence to boost and optimize production volumes at lower cost structures.
In Guyana, XOM has made several oil and gas discoveries, further highlighting its solid production outlook. Robust production from both assets has been aiding its top and bottom lines. In both resources, the breakeven costs are low.
Flexible Crude Mix Strengthens PARR’s Refining Position
The high oil price is not favorable for refiners like PARR. However, its attractiveness is reflected in the fact that instead of relying on a single source of crude, Par Pacific has been depending on crude from a variety of sources, comprising U.S. inland oil fields, waterborne sources and Canadian heavy crude.
A significant portion of crude oil sources is waterborne, while 19% consists of Canadian heavy oil. While exposed to multiple sources, Par Pacific has the option to switch if the price of one crude oil type rises.
Image Source: Par Pacific Holdings Inc
Since it has exposure to Canadian heavy oil, which is cheaper than lighter crude, Par Pacific is likely to be enjoying a cost advantage. In other words, the refining player has been capable of using lower-priced fuel to produce high-value end products, giving it an edge over other refiners and helping it continue its upward trajectory.
PARR’s Refining Margin to Remain Strong
Moreover, Par Pacific continued to benefit from a strong refining market as it entered the third quarter. Its refining index, which is a rough measure of how profitable it is to turn crude oil into products like gasoline and diesel, was still very high in July at $31.34 per barrel, only slightly below the second-quarter average of about $33. Demand for fuels remained strong, especially on the mainland, while global fuel inventories stayed relatively tight. In simple terms, there was still healthy demand for refined products and limited excess supply, which helped PARR continue earning attractive margins from its refineries.
PARR appears well-positioned to benefit from still-strong refining margins, firm fuel demand and tight global product inventories.
Which Stock Will Stay Ahead? XOM or PARR
Coming to the valuation story, XOM is trading at a premium. On a relative basis, the stock is trading at a 9.21x trailing 12-month Enterprise Value to Earnings Before Interest, Taxes, Depreciation and Amortization (EV/EBITDA), which is a premium compared with PARR’s 3.33x.
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Hence, ExxonMobil stock, which is an integrated energy giant, is more expensive than PARR. So, investors shouldn’t rush to bet on XOM right away. Those who have already invested may retain the stock. XOM currently carries a Zacks Rank #3 (Hold).
Investors willing to take risks should bet on the smaller energy stock PARR, which operates in a solid refining business environment, despite high oil prices. The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
To conclude, PARR could offer greater upside than XOM, given its stronger exposure to the favorable refining environment and cheaper valuation, although XOM remains the much larger and financially stronger company.
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This article originally published on Zacks Investment Research (zacks.com).