Let’s face it. Exxon Mobil (NYSE:XOM) stock has not been a winning bet over the past five years. During this period, XOM stock has delivered an annualized total return of -2.3%, hardly lighting the world on fire.
But the fact that XOM stock has delivered a 14% total return in 2019 through July 5,is evidence that Exxon Mobil stock is turning the corner.
However, in the past three months, XOM stock has dropped 6.5%, prompting me to wonder if it’s time to buy it on the dip.
Here are my thoughts on the subject.
Why Investors Should Buy XOM Stock on the Dip
By no means is Exxon Mobil trading near its 52-week low of $64.65, so I wouldn’t say that XOM stock is a screaming buy at the moment. Over the past five years, XOM stock’s only dropped below $70 on one occasion, and that was this past December when it hit its 52-week low.
From a valuation perspective, Exxon Mobil stock is currently sitting near a five-year low. For example, its current price-earnings ratio is 17.5, well below its five-year average of 21.9. The same discount applies to the price-cash flow, price-book, and price-sales ratios of Exxon Mobil stock. They’re all below their historical norms.
If the valuations revert to the mean, XOM stock will move higher.
While the company’s struggled in recent years, it’s expected that the sale of its Norwegian offshore assets could fetch a pretty penny.
On June 22, it announced that it was considering selling all of its stakes in oil and gas fields off the Norwegian coast. While it no longer operates any Norwegian offshore rigs, it does own more than 20 stakes in offshore fields operated by others.
“The move doesn’t come as a surprise. We recently highlighted Norway amongst a US$48 billion pool of assets from which we think ExxonMobil could meet its recently announced US$15 billion divestment target,” said Wood Mackenzie analyst Neivan Boroujerdi in late June.
“The sale has the potential to be Norway’s biggest since Statoil’s merger with Norsk Hydro announced in 2006,” added Boroujerdi.
So, despite the fact that Norway is no longer a major part of XOM’s business, the unit looks poised to attract a lot of attention from private equity firms.
An additional reason to consider XOM stock at these prices is the fact that the world’s demand for fossil fuels over the next few decades is expected to increase or remain steady, providing investors with many years of continuing profits.
“Natural gas demand, for example, surged last year, and McKinsey reports that gas demand will continue to increase from about 3,500 billion cubic feet (bcf) today to a peak of about 4,200 bcf in 2035 before declining slightly back to today’s level by 2050,” wrote the Financial Post’s Terence Corcoran in an article published on June 26. “Over the next 30 years, oil will also gain from 100 million barrels a day (MMBD) a year today to 108 MMBD a year in 2033 before falling back down to 100 MMBD by 2050,” he added.
Why Investors Shouldn’t Buy XOM Stock
Exxon Mobil announced on July 8 that it expects its second-quarter profit to be less than during the same period a year ago and unchanged versus Q1 due to lower natural gas and chemical margins.
So, despite the fact that its Q2 oil profits will be as much as $600 million higher than in Q1, natural gas prices, which have dropped to multi-year lows, will offset those gains.
As a result of weak natural gas prices and the weakness of XOM’s chemicals and refining divisions, research firm Edward Jones lowered its earnings per share estimate for XOM stock by 7 cents to $0.88 a share, well below analysts’ average estimate of $0.97.
Exxon continues to work on turning around the company. However, its plan is going to take much longer than investors initially thought, putting downward pressure on XOM stock price over the second half of the year.
I wouldn’t buy XOM stock over $70. Let Exxon Mobil stock come to you.
The Bottom Line
With more than $14 billion of free cash flow in the trailing 12 months despite poor first-quarter earnings, Exxon Mobil remains a value play worth considering.
But don’t look to buy the shares until they’re in the $60s.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.