Should You Buy Exxon Mobil (XOM)? 3 Pros, 3 Cons

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When dealing with industry downturns, Exxon Mobil Corporation (NYSE:XOM) is no slouch. After all, Exxon Mobil’s roots go all the way back to the Standard Oil empire of the 19th century.

Exxon Mobil Corp. (NYSE:XOM)So, with the recent plunge in crude oil, Exxon Mobil has indeed found ways to manage, as seen with its latest earnings report.  XOM stock beat expectations by a hefty 41%, which was the best performance in over a decade.

Despite all this, XOM stock has languished along with the rest of the sector. For the year so far, the return is about -8%.

Maybe this is an opportunity for value investors? Well, to see, let’s consider three pros and three cons:

XOM Stock Pros

Integrated Global Platform. The operations of Exxon Mobil span all the key parts of the energy production and distribution process.

Yet not long ago, there was lots of pressure to spin off some of these assets to “enhance shareholder value.”  But XOM management believed that the integrated model would be key to weather the inherent volatility in the energy business.

And yes, this has turned out to be spot-on.  For example, Exxon Mobil’s refining and chemicals segments have done quite well due to the lower costs of inputs. In the latest quarter, the profits more than doubled to $1.67 billion.

Secular Trend. According to XOM forecasts, the prospects for energy look bright. With the world population expected to increase from 7 billion to 9 billion by 2040, there will be continued demand. In fact, Exxon Mobil believes that crude oil will remain the largest source and natural gas will become second, accounting for about 60% of the world’s energy needs.

The good news is that XOM has continued to invest heavily in new supplies, with the capital budget expected to be about $34 billion for this year. Exxon Mobil also has the resources and technologies to extract energy from difficult environments, such as in the deep seas or rugged geographies. Consider that XOM has developments in areas like Nigeria, Angola, Romania, Tanzania, Siberia, Argentina, Colombia and Kazakhstan.

Financial Strength. XOM is juggernaut, with a market capitalization of $357 billion. Exxon Mobil is also one of a handful of companies that have an AAA credit rating. As a result, XOM stock is in an enviable position to capitalize on the recent slide in the oil industry.

Let’s face it, it would not be surprising to see Exxon Mobil ramp up its deal-making. As the old saying goes: “It may be cheaper to drill for oil on Wall Street than in the fields!”

Despite the fall in crude prices, XOM stock has continued to pump out strong cash flows. In the latest quarter, Exxon Mobil came to $5.2 billion.

With a healthy balance sheet, Exxon Mobil has continued to buy back XOM stock and pay healthy dividends. Actually, Exxon Mobil’s current yield is 3.4%. XOM has increased the payout for the past 32 consecutive years.

XOM Stock Cons

Oil Prices. Oil prices are cyclical and tough to predict. There have also been times when oil prices have remained depressed for prolonged periods, which happened during the 1980s and 1990s.

As for the current environment, Organization of the Petroleum Exporting Countries (OPEC) has been focused on letting oil prices drop so as to maintain market share, which has led to plentiful supplies on the market. At the same time, producers in the U.S. have continued to keep up robust production.

In light of all this, Exxon Mobil CEO Rex Tillerson thinks that there will likely be low prices for a few years.

Politics. Politics is a big wild card, especially for Exxon Mobil. With extensive global operations, XOM has to manage complex relationships.

Even though Exxon Mobil has a strong focus on risk management, there are times when things go sour.  Just look at XOM’s operations in Russia, which has the most acreage for exploration in its portfolio (63.7 million). The problem is that the U.S. sanctions against Russia have shut down operations, and no one knows when things will get back into gear.

Production. Extracting new supplies of oil seems to get tougher and tougher. Although, in the latest quarter, XOM showed some promise, with production up about 2.3%. Large projects in Angola and the Gulf of Mexico developed during the period. However, production can be volatile — and one quarter does not make a trend. Besides, the goal for XOM is to get production up to about 7.5%.

No doubt, Exxon Mobil is not the only large operator that has issues. Others like Chevron Corporation (NYSE:CVX), Royal Dutch Shell plc (ADR) (NYSE:RDS.A) and ConocoPhillips (NYSE:COP) have struggled with production over the years.

The Verdict on XOM Stock

If oil prices remain low for a while, this could actually be a good thing for XOM stock. Exxon Mobil should be able to generate strong cash flows from its diverse operations in refining and chemicals.

But the biggest opportunity is likely to be with consolidation. With XOM’s massive balance sheet, Exxon Mobil will be positioned nicely to pick up choice assets at compelling valuations. Over the long term, consolidation should help boost production and lower the overall risk profile. In the meantime, investors will get rewarded with a nice dividend.

So, should you buy XOM stock?

I think so — especially given Exxon Mobil’s strong platform and long-term growth opportunities.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2015/05/xom-stock-exxon-mobil-oil-prices/.

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