If you’re thinking about buying Exxon Mobil Corporation (XOM) stock, you have to start your research with the oil markets. Crude oil is off nearly 15% this year as of Friday. It’s off 70% from highs in mid-2014 and 74% from peaks hit in 2008.
Is a turnaround in crude coming any time soon?
It may have started.
Crude fell to the mid-$20 range in late January and early February and has rebounded by 10% or so since. Futures traders are betting there is a turnaround coming, but they’re cautious. If the spot market is around $30 barrel for light sweet crude (for March delivery) and $33 for Brent crude — the benchmark North Sea crude — traders see the market hitting $38 by year end. That’s roughly a 15% gain from that Brent level.
This makes XOM a potential value trade. The oil giant closed Friday at $82.50. The shares theoretically could rise to $94.88 if energy prices also rise 15%.
It’s OK to be skeptical. The average Wall Street price target on Exxon Mobil stock is $79.90; the median is $82. The high target of 21 analysts is $95.
XOM stock, however, is the best performer among oil giants this year. XOM was up about 6% in February as of Friday, compared with gains of 0.03% for Chevron Corporation (CVX) and 3% for Royal Dutch Shell Plc (ADR) (RDS.A, RDS,B) and a 9%-plus decline for BP Plc (ADR) (BP) over that time. The 16% decline XOM suffered in 2015 was also smallest among the four giants — although not by much.
And Exxon Mobil stock has been the third-best performer in the Dow Jones Industrial Average so far this year, behind Verizon Communications Inc. (VZ) and Wal-Mart Stores, Inc. (WMT).
Other Positives for Exxon Mobil
But the performance to date is not why you might think about buying Exxon Mobil stock. Here are four important reasons that make XOM a possible buy:
Exxon Mobil Is Much More Than Just Drilling and Producing Oil and Gas: Refining and marketing and a big chemicals business give XOM support in a rotten oil market. Its global downstream operations (that is, gas stations, refining, marketing and the like) earned $1.9 billion in 2015, up $283 million from 2014; Its chemical operations reported $4.4 billion in operating profit, up $103 million. Profit from its global upstream operations (production of oil and gas) fell from $27.5 billion in 2014 to $7.1 billion. Its U.S. upstream business lost $1.1 billion, down from an operating profit of $5.2 billion.
Exxon Mobil Is Still Making a Lot of Money, Just Not as Much as Before: Net income of $16.2 billion in 2015 on revenue of $268.9 billion were down about 50% and $35%, respectively, from 2014. Exxon Mobil still generated $30 billion in cash from operations in 2015, though that was off a third from a year ago. But if oil prices rally to $38 or higher, that flows straight to the bottom line.
Exxon Mobil’s Dividend Looks Secure: Exxon Mobil paid out $2.88 a share in dividends in 2015, up 6.7% from 2014. The dividend is now $2.92, which means a 3.5% yield. The 10-year Treasury yield is just 1.7%. Exxon’s dividend payments represented about 75% of net income, but, remember: Reported net income is about half of the company’s operating cash flow. Exxon Mobil has ample borrowing capacity as well. There’s a caveat we must add here: If oil prices fall further, the issue will come up again.
Exxon Mobil Is so Financially Strong That Failure Isn’t Going to Happen: Don’t laugh. Bankruptcy courts in Delaware, Texas and elsewhere will likely see a lot of Chapter 11 bankruptcy filings from energy companies that borrowed heavily when crude oil topped more than $100 a barrel. Exxon had assets of $340.7 billion at the end of the third quarter and $170.7 billion in equity. (The fourth-quarter balance sheet isn’t yet available.) Long-term debt is a minuscule $19.8 billion. And it has another $51 billion or so in other long-term liabilities, such as deferred taxes and pension reserves. Still not much, relatively speaking.
So Is XOM Stock a Buy?
Still, there are questions any investor must consider.
The biggest, obviously, is whither oil prices are going. Both Brent and light sweet crude have dropped below $30 in recent weeks but then bounced back on speculation Saudi Arabia, Russia and the Organization of Petroleum Exporting Countries would freeze production rates. That’s still the talk, and oil prices continue their roller coaster ride.
Also, XOM failed to replace its reserves in 2015 for the first time in 22 years. It added 1 billion barrels of oil (or the natural-gas equivalent) last year, about two thirds of what it produced. As The Wall Street Journal noted, not replacing reserves is evidence of the extreme damage the oil-price collapse has caused.
An energy producer must find new reserves every year or, as oil speculator T. Boone Pickens has often said, the company is effectively liquidating itself.
Additionally, your values may be different from Exxon Mobil’s. It has been a big contributor to Republicans over the years. XOM spends heavily to fight regulation. It is currently the subject of probes from a number of states over whether statements made to investors about climate risks as recently as this year have conflicted with the company’s own research.
It’s not clear if those probes will be anything more than well-publicized nuisances.
Exxon Mobil stock is off 22% from its all-time high in June 2014. It’s stable, but the XOM stock chart suggests strong support doesn’t kick in until the mid-$60 range.
But if you can live with those questions, Exxon Mobil stock looks like a buy, especially for a patient investor.
As of this writing, Charley Blaine did not hold a position in any of the aforementioned stocks.
