Exxon Mobil (NYSE:XOM) stock needs something to move the needle. Shares in the oil and gas giant have been stagnant year-to-date. The stock opened 2019 at $67.35. At the market close Aug. 23, shares traded at $67.49. But in the long term, could investors see a material boost in the XOM stock price? The company is making big moves to ramp up production, with expectations to double earnings by 2025.
Should investors join the ride and buy XOM stock? Or with the specter of a recession looming, should they sit tight and buy at a better price?
Let’s take a closer look at XOM and see what’s the verdict.
Increased Exploration Offers Opportunity (and Risk)
As I discussed in July, the company is pursuing high-ROI exploration opportunities. So far, their Permian Basin project has been a large success. Based on the most recent earnings announcement, production is up 20% from the prior quarter, and up 90% year-over-year. The company’s Guyana project is still in the early stages. But Exxon Mobil expects gross production could be over 750,000 barrels per day by 2025.
Exxon Mobil stock needs exploration success to move the needle. The company’s upstream operations are the current profit driver. Downstream (refining and marketing) operations continue to struggle. The refining unit swung from a $256 million loss in the first quarter of 2019 to $451 million in earnings for the second quarter. But quarterly earnings continue to be down from the prior year’s quarter ($724 million).
Refining margins are starting to improve, and the company is wrapping up required maintenance. XOM’s chemical unit also continues to struggle. Unit earnings for the quarter were $188 million, down from $518 million in the first quarter of 2019.
But it isn’t all smooth sailing. A lot could change in the oil market between now and 2025. A global recession could cause oil prices to fall further. Even if Exxon’s new exploration efforts have a low breakeven point, the return on investment would be impacted.
As InvestorPlace contributor Will Ashworth discussed last week, the company is taking a big risk boosting exploration efforts. The potential payoff is significant. But when oil could potentially fall further in the coming years, their capital investments may not produce a significant return. In addition, cash flow could decline, threatening both the dividend and the XOM stock price.
With this in mind, is XOM stock worth the risk? Let’s take a look at valuation and see how Exxon Mobil stock stacks up to peers.
XOM Stock Valuation
Exxon Mobil stock continues to trade at a premium to its integrated oil and gas peers. XOM stock trades at a forward price-to-earnings ratio of 14.4. The company’s enterprise value/EBITDA ratio is 9.4. Here are the corresponding earnings multiples of the company’s closest competitors:
BP (NYSE:BP): Forward P/E of 9.4, EV/EBITDA of 5.8
Chevron (NYSE:CVX): Forward P/E of 13.7, EV/EBITDA of 7.4
ConocoPhillips (NYSE:COP): Forward P/E of 12.1, EV/EBITDA of 4.1
Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B): Forward P/E of 9.2, EV/EBITDA of 5.5
The company’s high dividend yield (5.2%) may help sustain the XOM stock price. With interest rates continuing to fall, it’s tough to find a high-quality 5%+ yield in today’s market. But is the company’s dividend sustainable? Exxon’s payout ratio is currently almost 80%. This means that the company needs increased earnings to grow the dividend. XOM is for now a dividend aristocrat. But a tougher oil market and increased capital expenditures could change that. Any sort of slowdown in the annual dividend increase (or a dividend cut) could materially impact the XOM stock price.
Exxon Mobil Stock Is Stable, But Not a Big Opportunity
Exxon Mobil stock is not the biggest opportunity in the oil and gas space. While the company is making big moves with their Permian and Guyana projects, this ramp-up in capital investment is going on as global oil prices remain volatile. If oil sees a jump in price over the next five years, the XOM stock price will see a massive boost. But if oil prices continue to fall, the company may not be able to continue their long track record of growing the dividend.
What does this mean for investors? Should they avoid Exxon Mobil stock? The other oil and gas names may be better buying opportunities. But a material drop in the XOM stock price could make it a screaming buy. However, with the stock’s current high yield, it is doubtful the stock will start trading closer to the valuation of its peers.
XOM stock is stable, but look elsewhere for big returns.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
