Gas and oil stocks like Exxon Mobil Corp. (NYSE: XOM) have been in focus lately. Political turmoil in the Middle East has caused a big rise in crude oil prices. Sure, there was a brief pullback in oil following the Japanese earthquake due to the notion that aggregate oil demand would decline, but that issue seems to have been forgotten. And now that the civil war in Libya has become an international affair, oil prices are back up — way up — and trading at their highest levels since September 2008.
If you subscribe to conventional wisdom, you may think that higher oil and gas prices are a positive development for a company like Exxon Mobil Corp. But since the stock hit its February highs, XOM shares are down more than 5%, while oil prices have jumped over 20% since mid-February.
So what gives? Does the recent decline in XOM shares represent a buying opportunity, or is this selloff the beginning of an oily future for the Dow component? Here are the pros and cons of Exxon Mobil.
Pros for XOM Stock
The Street loves Exxon: All eyes are on the oil sector right now, and analysts in the space are trying to pick the winners. According to Goldman Sachs (NYSE: GS) oil analyst Arjun Murti, equities are currently discounting oil at about $90 a barrel. His forecast for major oil companies reflects oil prices of $110 a barrel, as he anticipates strong global demand. Based on this disparity, Murti has upped his six-month price target on XOM from $82 to $102.
Pullback and bounce above the 50-day average: From a technical perspective, XOM shares appear to have recovered from the recent selloff. After plunging below the 50-day moving average and dropping under $80, XOM shares found some strong buying momentum. This tells us that investors want to own the stock on pullbacks, and as the old adage goes — don’t fight the tape.
Back in the Gulf: Exxon Mobil just received permission to begin deep-water drilling operations in the Gulf of Mexico. XOM is one of only a three other companies cleared to work in the area representing the largest source of domestic crude since the infamous BP Plc (NYSE: BP) oil spill last year. The new drilling permit should give XOM a leg up on the deepwater competition, and it also should provide a boost to its share price.
Now, on to the 3 cons against Exxon stock …
Cons of Exxon Stock
Too far, too fast. While Exxon Mobil (NYSE: XOM) shares have come back off recent lows, the current price of about $83 still represents about a 47% surge since the stock hit its 52-week low back in July 2010. That kind of run is very, very fast for a mega-cap like Exxon. Some say the rise is too far, too fast for the largest publicly traded company in the world. Traditionally, this kind of rapid ascent is not sustainable.
Low production growth and replaced reserves. Exxon Mobil recently reported stellar earnings, but there was one big red flag for the oil giant going forward. The company reported relatively low 2011 production growth guidance of 3% to 4% year over year. Though Exxon Mobil replaced over 100% of its proved reserves in 2010, it did so largely as a result of its acquisition of XTO Energy. On an organic basis, its replacement rate was only 45%.
A souring of the energy trade. Sure, the energy trade has been big news this year, but what happens when oil prices once again recede to the back pages? XOM and other oil giants are likely to see an exodus of capital away from the sector and into the next big thing. This scenario could pull the shares back down below their 50-day once again, and this time they may not bounce back so quickly.
Exxon Mobil: The Verdict
While it’s true that XOM stock has run up quite a bit over the past nine months, what’s also true is that the company has done so on incredibly strong earnings. Despite the con that the stock has run up very far, very fast, I think the verdict here is strongly in favor of the pros.
Investors who think those profits will continue to come in strong—and I count myself as one of them—should look to pick up XOM shares on any oily slide.
Exxon Mobil stock appears to be a buy, with the pros outweighing the cons.
At the time of this writing, Jim Woods had no positions in any of the securities mentioned here.
