The past year has been a bumpy one for oil and gas corporation Exxon Mobil (NYSE:XOM). After plummeting below $65 pear share back in December, Exxon stock made its way steadily above the $80 per share mark, leading some to predict that the stock would make its way back to its all-time highs above $100. However, worries about the firm’s upcoming earnings report on Aug. 2 have caused many to reconsider their optimism.
Late last week, RBC Capital Markets analyst Biraj Borkhataria downgraded Exxon Mobil stock to Sector Perform from Outperform. Borkhataria also lowered his price target to $90 from $100, citing concerns about the returns XOM can produce during the second half of the year.
Borkhataria isn’t the only one who has started to question whether XOM stock is worth its price tag either, Cowen analysts also pointed out that other oil and gas plays like Chevron (NYSE:CVX) and Shell (NYSE:RDS.A) might be better choices.
A Closer Look at Exxon Stock
The concern isn’t unfounded. Exxon stock is expensive compared to many of its peers. While Exxon’s P/E ratio of 17.31 isn’t far off that of CVX’s 17.35, it’s worth noting that XOM trades at 20 times its forward earnings, compared to RDS.a’s 11 and CVX’s 17.
Not only is Exxon more expensive than most of its oil and gas peers, but it’s also due to disappoint this quarter as well. Earlier this month Exxon’s management warned that second-quarter earnings may not be as rosy as expected due to lower than expected chemicals margins.
Plus, XOM is stuck paying more in order to ramp up oil-equivalent production, 75% more than Chevron according to Devin McDermott at Morgan Stanley. That extra spending is part of Exxon’s counter-cyclical growth strategy, which is likely to pay off in the future but might hurt returns in the near term.
Renewable Energy Concerns
On top of worries about XOM stock’s upcoming earnings report, there is the overarching fear that the oil industry itself is unlikely to return to its former glory.
Renewable power has been a huge draw for investors as more and more countries lean into reducing their carbon emissions. While that’s certainly something to keep in mind, the oil is likely to remain in demand for the foreseeable future according to Exxon’s predictions.
A Lot to Like About XOM Stock
The concerns about Exxon’s future are worth keeping in mind. There’s no doubt that the firm has some turbulence ahead.
However, one of the biggest reasons that Exxon is more expensive than its peers is the fact that the company has been historically conservative and dependable. XOM’s stock price isn’t the only reason its investors make money. The company’s 4.64% dividend yield is a huge incentive to hold on to shares, especially for income investors.
Plus, XOM stock is backed by an iron-clad balance sheet with significantly lower debt than any of its peers. Exxon’s long-term debt comes in at just 10% compared to RDS.A’s 39% and CVX’s 17%. That’s something worth considering when buying in the unpredictable oil and gas sector. Right now XOM looks most likely to survive, and thrive, in a worst-case scenario.
The Bottom Line on Exxon Stock
I wouldn’t rush out to sell XOM stock anytime soon. The company’s long-term future looks strong and although there could be some near-term turbulence, 2020 is likely to see things pick up again.
If you’re looking for an entry point, waiting until the share price sees another pullback could be wise, especially considering the firm’s upcoming earnings are unlikely to impress.
However, before you panic at a slew of downgrade headlines keep in mind that RBC’s freshly lowered price target of $90 still represents a 17% upside from where the stock trades today.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
