Here’s Why Exxon Stock Is a No-Brainer for Long-Term Investors

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If you want an exciting trade this week, don’t buy ExxonMobil (NYSE:XOM) stock. On the other hand, if you want a stock that will crush the market over the next 10 years, Exxon stock is a fantastic choice.

Here's Why Exxon Stock Is a No-Brainer for Long-Term Investors

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Since late 2015, XOM stock has faithfully traded in a narrow range between $75 and $90 per share. Dating back almost 15 years, Exxon Mobil stock hasn’t traded below $50 or above $100.

All that stability came while the stock market lost half its value in 2008 and then subsequently went on to quadruple. And the price of oil has ranged from $27 to $147 per barrel over the same span. Yet XOM stock has been dormant for more than a decade. That’s in contrast to some rivals like Chevron (NYSE:CVX) which have driven some share price appreciation since the financial crisis.

That won’t last forever, however. In fact, over the next couple of years, I expect Exxon Mobil stock to finally break out of this persistent trading range. And the next move will be higher. Here’s why.

Oil Market Is Finally Starting to Cut Supply

People aren’t great at timing economic cycles. Folks often buy when things seem brightest, and give up hope right near the bottom. Unfortunately, many corporate executives act the same way. The price of oil crashed from $100 to less than $50/barrel way back in 2014-15. Yet the energy industry kept up its drilling plans well into 2016. It took a long time and a lot of bankruptcies before the energy industry started to adjust to a world of sub-$100 oil prices again.

Now, fast forward to 2019, and the oil industry has finally gotten into hunker-down mode. Executives are now stressing cutting costs and shoring up the balance sheet. This would have been a great approach four years ago. But it makes less sense now.

Inevitably, at some point, oil prices will move higher again. And the longer they stay low, the more powerful the next rally will be. As the old trading adage goes, in commodities, the cure for low prices is low prices. Once producers can’t make money, they (eventually) lower supply. This is finally happening across the oil industry internationally, with the profligate shale producers in the U.S. in particular finally cutting back their efforts. This, in turn, leaves the oil market more ready to move higher again.

Be it a geopolitical shock, a drop in output from somewhere like Venezuela, or an upturn in the global economy causing more oil usage. When the supply/demand picture improves, crude oil will be ready to surge.

Exxon Ready to Profit from the Next Oil Boom

From small E&P companies up to Exxon’s closest rivals, capital discipline has become the name of the game. Management teams have finally stopped spending on marginal products.

Exxon, with its impeccable balance sheet, huge roster of development projects, and patient approach, is now ready to take the opposite side. While the oil industry pulls back, Exxon is now prepared to go full steam ahead.

In fact, Exxon is making downright bold moves at this juncture, given that the price of oil and natural gas have both been muted recently. Nevertheless, Exxon is planning a huge capital spending program with the ambitious goals of doubling both its earnings and cash flow from 2017 levels by 2025.

What does that look like if and when management succeeds? Exxon earned $4.63 for fiscal year 2017. Doubling that would cause Exxon stock to earn more than $9 per share. That works out to just an 8x P/E ratio on the current stock price. Put a modest 12x P/E ratio on those earnings, and you’d have a $108 stock along with new all-time highs. Throw in any significant bump in oil or natural gas prices and the upside gets even sweeter.

Cash flow looks equally impressive. Exxon brought in $30 billion in operating cash flow in 2017. Take a moment to consider the size of that number even in a down year for oil, Exxon still brings in $30 billion in cash flow. Double that, and Exxon will be pulling in $60 billion a year of cash by 2025. The market cap of Exxon is just $320 billion now; generally Exxon stock sells for at least 8x cash flow. That would imply a market cap of $480 billion or more over the next six years, offerings 50% share price upside.

Exxon Stock Verdict

Many, perhaps even most, people own XOM stock for its dividend. If you read the above paragraphs as a growth investor, you might have been underwhelmed. What’s so exciting about XOM stock potentially going up 50% over the next five years or so? Again, Exxon Mobil is not the world’s most exciting stock; you shouldn’t buy it for rapid short-term gains.

But as a growth and income investment, you can hardly do better. Exxon Mobil has continuously raised its dividend every year dating back to 1983. That included the stretch of the late 1990s, when U.S. gasoline fell to below $1 a gallon during a historic oil slump. It also included the Great Financial Crisis and the oil price crash of 2014-15. Exxon Mobil has a fantastic balance sheet and a truly unparalleled scale of its business.

When Exxon Mobil stock is down or, as in this case, has been flat for more than a decade, you have a chance to buy into a global titan at a reasonable price. Investor adviser Joshua Kennon put it well:

Nevertheless, it’s true when you understand one fundamental fact: When you buy a share of the oil majors outright, paying for it in cash and locking it away, you are being paid to absorb volatility over multi-year periods.

XOM stock may finally go up next year. It may take five years. But until then, we collect a juicy 4.6% dividend yield which will be increased further every year. At some point, our investment will pay off in spades. As it is, as Kennon says, we get a fat dividend in return for taking on oil stocks at a time when most folks don’t care because the industry is in the doldrums.

At the time of this writing, Ian Bezek owned XOM stock. You can reach him on Twitter at @irbezek.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2019/07/exxon-stock-no-brainer-long-term-investors/.

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