Exxon Mobil (NYSE:XOM) stock doesn’t move very much when the price of oil changes, because Exxon Mobil’s future prospects aren’t significantly changed if the price of Brent goes up or down by one dollar. Given its strong balance sheet and competent management, Exxon Mobil will likely still be around if Brent trades for $50 per barrel, just as it will be around if Brent trades for $100. Because it has a downstream business, it isn’t as exposed to upstream oil prices.
No, for investors, Exxon Mobil stock is much more of a dividend stock than a fast mover. Not only does XOM boast strong cash flow generation, but it has increased its dividend every year for 37 years. The company currently pays investors 87 cents per share quarterly, resulting in a solid 4.6% yield.
While Exxon Mobil isn’t a get-rich-quick stock, XOM stock could shoot higher in the near term if these three potential catalysts occur:
XOM Stock Could Rise if Oil Prices Go Up
I know I said oil prices don’t move Exxon as much as they do some other oil companies. But that doesn’t mean improving prices won’t give it a boost. If a war breaks out in the Middle East, oil prices could rally higher and Exxon Mobil will benefit with greater near-term cash flows.
While a full scale armed conflict with Iran doesn’t look likely right now, tensions between the U.S. and Iran have gotten worse, with both sides reportedly shooting down one of the other side’s drones.
If the tensions escalate into more than drone shooting, the news could prompt Brent to go higher — and Exxon Mobil’s upstream business would profit.
Exxon Does M&A That The Market Likes
Although Exxon is already a huge super-major that realizes economies of scale that few firms can rival, the company isn’t perfect. It isn’t as big in the Permian as it would like — and due to favorable geology, production in the Permian Basin can be cost effective. In fact, even at $35 per barrel, Exxon expects that its Permian production will likely yield an average return of over 10%.
Currently, Exxon has a resource base in the Permian of around 10 billion oil-equivalent barrels, and the company has plans to produce over 1 million oil equivalent barrels per day from the Permian Basin as soon as 2024. If the company makes additional M&A deals to buy more Permian resources that the market likes, Exxon Mobil stock could receive a boost.
Sell More Assets, Announce More Stock Buybacks
A decade ago, Exxon’s buyback program was the largest in the S&P 500. Now, the company doesn’t have an active buyback program at all. In fact, Exxon stands alone as the only supermajor without an active stock repurchase program in recent quarters.
That isn’t as positive for the XOM stock price as it could be.
Rather than buy back stock, management seems to be prioritizing investment in the company’s refining, upstream and chemical segments and replenishing the company’s natural gas and oil reserves. Although that’s good news for long-term shareholders if these investments boost EPS, they won’t do much in the short term.
If management changes their mind and favors a more buyback-heavy capital allocation strategy, however, Exxon certainly has the firepower to buy back a lot of stock. And that could potentially send the stock higher in the short term. The company has strong free cash flow and plans to generate around $15 billion in cash through asset sales through 2025.
There are some indications that management might be leaning towards more buybacks. According to a CNBC interview in March, CEO and Chairman Darren Woods indicated that they might use some of the asset sale money to potentially buy back stock. More details on the buyback program and a bigger than expected repurchase could send XOM stock price higher.
As of this writing, Jay Yao did not hold a position in any of the aforementioned securities.
