Why ExxonMobil, ConocoPhillips, and BP Shares Dropped Today

Tuesday looks like a bad day to invest in oil stocks as unfavorable news from the oil sector weighs on shares of the oil majors ExxonMobil (XOM -2.68%), ConocoPhillips (COP -3.35%)and BP (BP -3.30%).

OilPrice.com reports a “pleasure” below $75 per barrel in Brent crude prices (currently $74 and changing). WTI crude — more popular in the U.S. — is down a similar 3.8% to around $70.70 as of 10:30 a.m. ET.

Exxon shares fell 3.2 percent in response, followed by BP down 3.5 percent, with Conoco trailing with a 3.7 percent loss.

What are the oil stocks in trouble today?

OilPrice.com lays the blame for today’s selloff squarely at the feet of OPEC — or, more specifically, OPEC+, which includes Russia and other non-OPEC oil producers. Aiming to stabilize oil prices following production cuts in Libya, OPEC+ plans to gradually increase output starting in October, a move that would increase oil supplies and thereby lower oil prices.

What’s interesting, though, is that the size of OPEC+’s output increase — set to start at just 180,000 barrels per day (bpd) — will barely cushion Libya’s loss. 700,000 bpd production. Taken in isolation, then, this seems like a weak catalyst to do so much damage to oil prices today.

But a second factor is also affecting oil prices: China.

It is the world’s largest oil importer, and Reuters reports that output from the Middle Kingdom fell to a six-month low. Additionally, the nation’s purchasing managers’ index fell from 49.4 to 49.1 in July, indicating that the economy is currently in a state of contraction. OilPrice assumes this is “bearish” for Chinese oil demand. And if Chinese demand is falling, it means global demand is also falling. And if you’ve taken Econ 101, you know what that means: the price of oil will go down, too.

What we see happening today.

Is it time to sell oil stocks?

Now here’s the good news: oil is well known to be a cyclical industry, one where strong prices are followed by weak prices and vice versa. Therefore, if you can be patient, oil prices are likely to improve, and with them the popularity of oil stocks like Exxon, BP and Conoco.

And it’s not like these three stocks are terribly expensive!

Valued at 14 times trailing earnings, ExxonMobil shares are the most expensive of the three. With long-term forecasts for 6% annual earnings growth and a 3.2% dividend yield, Exxon shares cost more than I’d be willing to pay. But with a P/E ratio that is less than half of S&P 500 index average of 29, Exxon still offers a relative bargain.

Conoco’s valuation is similar but better. It pays a slightly lower dividend of 3.1%, but has a slightly better forecast growth rate of 7%. And at a valuation of just 13 times earnings, Conoco stock is slightly cheaper than Exxon.

However, my favorite of these three oil stocks is BP. Costing just 13 times earnings, like Conoco, it pays a much dividend yield better than 5.7%. Earnings growth should be huge next year – up to 57% – as BP bounces back from a lackluster 2024. And the British oil company boasts a strong free cash flow of $16.3 billion, which is more than twice its reported net income.

Call me an Anglophile if you want, but I like BP stock better than Exxon or Conoco today.