Exxon Mobil (NYSE: XOM) stock is treading water. After rallying from roughly $69 in January up to over $83 in April, shares in the oil and gas giant have dipped below the $75 level.
While offering a solid dividend yield, a lack of catalysts means the XOM stock price will likely stay within the $70 to $80 trading range. Read on to see why Exxon Mobil stock continues to be a hold.
Downstream Business Facing Challenges
For the first quarter of 2019, the big oil firm saw quarterly earnings fall from $6 billion to $2.35 billion. Downstream (refining) was the biggest cause of the earnings decline.
One-time events such as asset sales in Q4 can explain some of the downstream earnings decline. But the lion’s share was due to lower refining margins. The downstream segment went from a $2.7 billion profit in Q4 2018 to a $256 million loss in Q1 2019.
Scheduled maintenance was another factor in the downstream unit’s weak performance. Moreover, the company expects to spend similar amounts on maintenance in Q2.
Upstream Offers Stability in XOM Stock
While the downstream business faces headwinds, upstream provides some positives for the XOM stock price. The company continues to increase production in the Permian Basin. Exxon Mobil’s exploration off the coast of Guyana has also yielded strong production opportunities.
In their June 2019 JP Morgan Energy Conference presentation, Guyana and other projects provide a high internal rate of return with a low breakeven rate. The company’s expertise in developing new production partially outweighs the cyclicality of the downstream refining business.
The relative strength of the exploration and production segment has blunted refining challenges. But additional weakness across Exxon Mobil’s other business lines could hurt Q2 results.
Q2 Earnings Outlook
Exxon Mobil is scheduled to release Q2 earnings in early August. While the company expects improved refining margins, this may not be enough to counter additional issues. Analysts project the oil firm’s natural gas and chemical businesses to lower operating earnings.
A decline in natural gas prices offsets an estimated $400 million to $600 million boost to Exxon Mobil’s profitability from increased crude oil prices. Low margins and continued maintenance negatively impact the chemical unit.
While earnings growth does not appear to be in the cards, there is a positive takeaway: Exxon Mobil stock continues to pay out a solid dividend, providing income-oriented investors a strong reason to consider a position.
XOM Remains a Dividend Aristocrat
Exxon Mobil stock has seen annual dividend increases for 37 consecutive years. The five-year average growth rate of the dividend is 5.6%. With a current dividend yield of 4.6%, XOM stock is a solid opportunity for passive-income investors.
The XOM stock price receives strong price support from the dividend. This somewhat coerces Exxon Mobil to continue the payouts to keep shareholders happy.
Without a long-time rise in oil prices, it may be tough for XOM to continue growing the dividend. However, thanks to continued global demand for oil, the company may have the long-term earnings growth necessary to sustain approximately six annual dividend increases.
But can investors count on the dividend yield alone to deliver value? Is the current valuation sustainable, or could the XOM stock price see additional declines? Let’s see how Exxon Mobil compares to its peers:
Exxon Mobil Stock Overvalued Relative to Peers
At the current XOM stock price, the company trades for 20.2-times forward earnings, and an enterprise value (EV)/EBITDA ratio of 9.7. This valuation appears stretched relative to the company’s integrated oil and gas rivals:
BP (NYSE: BP): 13-times trailing earnings, EV/EBITDA of 6
Chevron (NYSE: CVX): 16.9-times forward earnings, EV/EBITDA of 8
ConocoPhillips (NYSE: COP): 12.4-times forward earnings, EV/EBITDA of 4.8
Royal Dutch Shell (NYSE: RDS.A): 11-times earnings, EV/EBITDA of 5.9
One may think that the XOM stock premium is the result of a high dividend. But Exxon Mobil stock does not have the highest yield: For instance, BP has a 6.26% yield, while Royal Dutch Shell sports a 5.94% yield. And Chevron and ConocoPhillips aren’t too far behind at 3.83% and 2.04%, respectively.
Therefore, looking at both earnings power and dividend yield, it is crystal clear Exxon Mobil stock is not an outstanding opportunity for value or dividend investors.
Bottom Line: Exxon Mobil Stock Is a Hold
Exxon Mobil stock has been hammered by weak refining margins. Despite these risks, XOM stock trades at a premium to its fellow integrated oil and gas companies.
The company continues to be a dividend aristocrat, raising the payout for the 37th consecutive year. The dividend yield is solid, but not as high as those paid by BP and Royal Dutch Shell.
With improved refining margins, Q2 earnings (anticipated for early August) could satisfy investors. However, weakness in natural gas and chemicals could outweigh a rebound in refining margins.
With upside questionable but downside protected by the dividend play, XOM stock is a hold. Investors should consider entering a position if the company starts trading at a discount to its peers.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
