Last December, I wrote a piece for InvestorPlace suggesting Exxon Mobil Corporation (NYSE:XOM) was severely overvalued. Since then XOM stock is down 8.3% through June 6, roughly 5% less than the United States Oil Fund LP (ETF) (NYSEARCA:USO).
With oil prices firming, it’s time to revisit my thesis. It’s possible that Exxon is now oversold. Using some of my brilliant colleagues at InvestorPlace, I’ll examine both sides of the value coin.
By the end, I’ll have come to a revised conclusion about Exxon Mobil stock.
Exxon Mobil Is Oversold
When it comes to energy stocks, not many InvestorPlace contributors can keep up with Aaron Levitt’s encyclopedic knowledge of the sector. Let’s just say you don’t want to go up against him in a stock-picking contest focused solely on energy stocks. I have no problem admitting he’d walk circles around me, and I consider myself a pretty good stock prognosticator.
Recently, Levitt highlighted five reasons you ought to be buying XOM stock. Spot on, as usual, it’s the reason I decided to revisit my December proclamation. I’m not suggesting I was wrong, but he certainly makes a good case that Exxon has nowhere to go but up.
I especially like his third reason to invest in XOM, which is diversification.
I’m a huge fan of all-cap investing. Why? Because I believe a portfolio is a team concept where someone’s always chipping in to keep it moving higher. Sometimes it’s the large-cap stocks doing well, sometimes it’s the mid-caps and small caps, and sometimes it’s even riskier micro caps. You just never know where the performance will come from.
That’s why diversification is so important to oil and gas companies.
“The benefit of being an integrated energy firm is that you always have one piece of your assets doing well. When oil is high, upstream and production makes plenty of profits. When oil is down, refining leads the way,” wrote Levitt. “That fact has managed to save XOM over the last couple of years. While oil was crashing, refining managed to keep the cash flows and profits coming.”
Although I’m not willing to concede that I was wrong at this point, I will go as far as suggesting if you are going to invest in an oil and gas stock, XOM is a smart one given its diversification and 3.8% yield.
Exxon Mobil Is Overbought
One of my reasons for thinking Exxon stock was overvalued were oil prices.
I believe that any cuts made by OPEC and non-OPEC countries won’t be permanent. If that’s true, oil prices won’t move beyond $50 and Exxon most certainly won’t deliver substantial increases in earnings over the next few quarters.
“Many think that today’s oil prices are too low. In fact, the average oil price since 1950 is $46 per barrel, in constant April 2017 dollars,” wrote oil industry geologist Art Berman in Forbes recently. “Today’s $50 oil price is 40% higher than it was during past times of growth during the Reagan through Clinton years in the United States.”
If you read the entire piece, you’ll see that Berman expects a price spike in the next decade due to a lack of investment by oil companies outside the shale plays. So if he’s right, although prices for the next few years could be in a tight range around $50, a slow-developing oil shortage could eventually boost the price of a barrel to $100 in short order.
The only way I see Exxon stock being worth more than the low-$80s in the near term is if it buys BP plc (ADR) (NYSE:BP), as Levitt and others are suggesting, giving it much stronger oil reserves.
Then, perhaps, you can make a case Exxon isn’t overbought.
Bottom Line XOM Stock
Exxon Mobil has net debt of about $40 billion as of the latest quarter. That’s more than 11% of its total assets. At present, BP’s got an enterprise value of $156 billion. Once Exxon acquires BP, the amount of debt as a percentage of total assets will likely increase threefold to as much as $200 billion.
That’s okay if oil prices ultimately rise well beyond $50. If not, XOM shareholders are looking at a stock price well below its current level.
I wouldn’t buy XOM stock. That said, it’s probably right where it should be until a catalyst, good or bad, moves it off its perch. Until then, it’s not oversold or overbought.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
