Exxon Mobil Corporation (NYSE:XOM), like all oil and gas companies, suffered when oil prices collapsed in 2014. Fortunately, its size left XOM stock in better shape than most of its peers in the industry. Now as oil prices begin to recover, “the largest publicly-traded international oil and gas company” finds itself well-positioned to bring income and wealth to shareholders again.
Exxon Fared Better than its Peers During the Energy Bust
With its large size and high revenues (over $271 billion for fiscal 2017), XOM remains the largest non-government owned oil producer in the world. It participates in upstream activities such as exploration and production. It also handles downstream operations such as refining and retailing.
The company also operates a separate chemical division. Lubricants, solvents, polymers, and packaging films are among the chemical division’s many products.
XOM’s diverse portfolio of products helped to keep ExxonMobil stable and profitable throughout the downturn. Still, it has not escaped the latest oil price apocalypse unscathed.
XOM stock lost 30% of its value in 2014-15 as declining oil prices cut output and profits. However, the company itself suffered a steeper decline. Between 2012 and 2016, revenues had been cut in half and profits fell by about 80%. Net income for 2016 at $1.88 per share is even less than its 2016 dividend of $2.98 per share.
The silver lining in that story is how XOM stock performed against its peers at this time. Despite the large drop in prices, the 30% drop in the stock price compares well with peers.
Chevron Corporation (NYSE:CVX) fell by about 40%. BP plc (ADR) (NYSE:BP) lost almost half its value in the same period. Chesapeake Energy Corporation (NYSE:CHK) fell by more than 80% as many analysts have raised doubts about Chesapeake’s future.
Exxon Stock Revived by Higher Oil Prices stock
ExxonMobil stock faces no such concerns. However, all oil companies need higher oil prices to drive profits. Fortunately, that issue has likely worked itself out for XOM and its peers. Crude oil currently trades at about $62 per barrel. The price has doubled in the last two years.
In early 2016, oil hit a low below $30 per barrel before moving up to the low $50 per barrel range by early 2017. The $62 per barrel price exceeds production costs even in countries where production is most expensive.
And these higher crude prices will benefit the earnings per share (EPS) of XOM stock. Revenues rose by 20% for fiscal 2017 and are predicted to increase 10% in fiscal 2018 due to better oil pricing. Considering that 2016 revenues were less than half of the revenues enjoyed 2012, this represents a dramatic turnaround.
The EPS benefits are more impressive. Analysts predict Exxon ended fiscal 2017 with a profit of $3.66 per share. Going out to fiscal 2020, consensus estimates place EPS at $4.81 per share. The 2020 EPS prediction does not compare to the $9.70 per share the company earned in 2012.
However, it represents a huge improvement over the $1.88 per share profit for 2016. It also allows XOM to resume making enough to continue its 35-year streak of annual dividend increases.
Moreover, the current stock price is around $87 per share, or about 28 times earnings. This price-to-earnings (PE) ratio exceeds the current S&P 500 average of around 24.
Still, the average PE for integrated oil producers stands in the 36 range. The XOM stock price has to move 30% higher to reach a fair valuation. This 30% move would move XOM above the $104 per share record set in 2014.
Final Thoughts on Exxon Stock
Now that oil prices have removed higher, ExxonMobil can gain the pricing power it needs to increase the value of its stock. Its size and its diverse petroleum-based product lines helped XOM maintain profitability as oil prices collapsed. Now with oil trading above $60 per barrel, profitable drilling can resume throughout the world.
These higher oil prices will allow the company to expand its profit margins. And with the increased profits, XOM stock can build enough momentum to push through its 2014 record high.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.