The Bull Case for Exxon Stock Is Strong, but It’s Not Perfect

There’s a nice bull case for Exxon Mobil (NYSE:XOM) at the moment. Earnings are set to grow at a nice clip going forward. Exxon stock pays an attractive dividend. Downstream and chemical operations provide a hedge to oil price weakness.

The Bull Case for Exxon Stock Is Strong, but It's Not Perfect
Source: Jonathan Weiss /

Indeed, XOM stock has rallied nicely since touching a 2019 low last month. Thanks in part to the generous dividend, I predicted in July that $70 would hold as a floor for Exxon stock.

That didn’t quite play out, as XOM went to $66, but the dip below $70 – and to a 5%+ yield – proved to be short-lived.

Back at $72, Exxon Mobil stock still looks attractive, but it’s not perfect. There are reasons why XOM stock has been dropping for the past five years. And there are plays elsewhere in energy that might be more compelling. XOM still looks like the easiest play in energy. But easiest isn’t always the best.

The Case for Exxon Stock

The case for Exxon stock has two pillars. First, earnings are set to grow sharply over the next few years. CEO Darren Woods said last year that Exxon Mobil would double its profits by 2025.

The company said in May that the plan remained on track. It noted at its March Investor Day that it could reach those goals with flattish oil prices and even assuming demand was cut to meet climate change targets.

The second, related, pillar is that the earnings growth can support continuing increases in the dividend, which can further support Exxon Mobil stock. To be sure, I’m not a fan of buying a stock for its dividend. That’s a dangerous play, a lesson learned by shareholders of General Electric (NYSE:GE) and CenturyLink (NYSE:CTL), to name just two.

But Exxon Mobil has some internal protections to its earnings thanks to its downstream and chemical operations. When oil prices fall, profits in upstream (exploration and production) drop. But they usually increase elsewhere in the business. Even as oil absolutely collapsed in the middle of the decade, XOM stock held up – and the dividend kept growing.

In an environment where 10-year Treasuries yield less than 2%, it’s difficult to believe that Exxon can yield 5% or more for very long. Last month’s move to under $70, as noted, was short-lived.

So Exxon Mobil stock is probably safer than some investors realize. Given its growth potential going forward, it’s cheaper than some investors realize. That’s a nice combination.

And it suggests a path to $100 or more, given plans to move EPS above $8 and the dividend potentially to $4+. Give Exxon a mid-teen P/E multiple or a 4% yield and the stock gains 50% or so from current levels: including dividends, likely double-digit annual returns.

The Risks

That said, even if risks are lower here than elsewhere in energy, risks aren’t zero. Climate change worries could drive lower energy demand amid both government regulation and changing consumer behavior. It’s not just Tesla (NASDAQ:TSLA) pushing electric vehicles, after all.

Lower gasoline demand doesn’t send Exxon Mobil profits to zero, as oil has other uses. But it does pressure Exxon Mobil earnings, and thus the XOM stock price.

Another factor is the role of ESG (environmental, social and governance) investing. Those funds may avoid Exxon stock, lowering demand in the market and potentially keeping a modest ceiling on performance going forward.

Finally, Exxon Mobil has to actually hit its targets – and get some help from oil prices in the process. Lower oil prices, too, don’t send Exxon Mobil earnings to zero. But if EPS is $6 in 2025 instead of $8+, Exxon’s next five years could look like the last five. Over that time, shareholders have lost about 10% of their investment, even including dividends.

The Bottom Line on Exxon Stock

The other question is whether there are other more attractive plays in the energy sector. It’s worth remembering that the same internal hedge that protects earnings in a lower oil-price scenario also makes XOM stock a notably poor play on oil prices.

Investors bullish on oil should look elsewhere, particularly with prices cheaper across the space. Both Exxon and Chevron (NYSE:CVX) have said that they expect shale M&A to continue, after Occidental Petroleum (NYSE:OXY) acquired Anadarko Petroleum earlier this year.

Concho Resources (NYSE:CXO) has been considered a logical acquisition target and is much cheaper after a post-earnings plunge. Other shale plays have fallen steadily since spiking after the Oxy-Anadarko bidding war.

Even in integrated oil, there are some intriguing plays. Chevron has been a better stock in recent years. BP (NYSE:BP) has a higher dividend.

Again, XOM the simplest play in the space. It’s likely, given its dividend, to preserve capital even if oil prices move to a so-called “lower for longer” scenario. But there are intriguing options as well. Oil bulls should look elsewhere. Income investors should take a look at BP. Exxon stock is a good option, but it’s likely it won’t turn out to be the best one.

As of this writing, Vince Martin has no positions in any securities mentioned.

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