Exxon Mobil Corporation (NYSE:XOM) stock is trading at the same level as it was during the beginning of 2019. Even with company-specific positives, Exxon stock has remained sideways due to economic headwinds.
As XOM consolidates in the $67 to $75 range, I believe that investors can consider exposure to the stock. In the next five years, Exxon Mobil stock can be among the best performers in the industry.
Before talking about the stock catalysts, it is important to discuss what has kept XOM stock sideways in 2019. The upstream segment is a potential game-changer for Exxon and with sluggish economic growth, the stock has been impacted.
The global manufacturing sector is in recession and the demand growth for oil has been impacted. In addition, the International Monetary Fund expects GDP growth for advanced economies to stagnate at 1.7% for 2019 and 2020.
As a result of this weak economic outlook, oil prices have declined and impacted the company’s average realization per barrel. Furthermore, the Energy Information Administration expects Brent crude price to average $63.6 in 2019 and $60.1 in 2020. The average oil price for 2018 was $71.2. Clearly, lower oil prices have kept XOM stock subdued.
However, with expansionary monetary policies in the United States, there is renewed hope for growth acceleration. OPEC has also agreed on deeper production cuts to support oil prices. With significant long-term demand likely from China and India, I do believe that oil will trend higher.
Guyana Asset Will be a GameChanger
In the upstream segment, Exxon Mobil plans to triple earnings by 2025 at $60 per barrel oil. Therefore, the segment is the key EBITDA and cash flow driver.
One of the assets that will boost production in the coming years is the company’s Guyana portfolio. During 2015-16, Exxon Mobil reported gross resources of approximately one billion barrels of oil equivalent. By 2019, the gross resources have swelled to six billion barrels of oil equivalent.
With continued discoveries and growth in resources, Exxon Mobil is expecting production in excess of 750,000 barrels of oil equivalent by 2025. The important point to note is that Exxon Mobil expects 10% returns even at $40 per barrel oil.
Considering this, even if oil is in the region of $60 to $70 per barrel, the asset is likely to be a money-spinner for Exxon Mobil. Production from Guyana asset will commence in 2020 and XOM stock is likely to trend higher as production accelerates.
Permian Asset Is Already Delivering Results
There is no doubt on the potential that Permian asset holds. Exxon Mobil has ambitious plans to ramp-up production in the asset by 2024.
From the current production of 274,000 barrels of oil equivalent per day, Exxon Mobil expects production to increase to one million barrels by 2024. Again, the important point to note is that the asset has an attractive break-even. Even if oil remains sideways to marginally higher, Exxon Mobil is positioned to deliver healthy cash flows.
Attractive break-even projects in Permian and Guyana will ensure that the company’s healthy dividend payout sustains. XOM stock has a current dividend yield of 5.0% and a dividend payout of $3.48. If oil does remain in the range of $60 to $70 per barrel, Exxon is well-positioned to increase dividends in the coming years.
My Final View on Exxon Stock
Exxon Mobil stock has remained sideways in 2019 due to economic headwinds and lower oil prices. However, the long-term outlook for oil is positive and it should help Exxon create value for shareholders.
Between 2019 and 2025, Exxon Mobil expects to generate free cash flow of $190 billion. This estimate is based on oil trading at $60 per barrel. I believe that oil can trend higher in the coming years. Therefore, free cash flows can possibly exceed the company’s expectations.
Even with $190 billion FCF visibility, Exxon Mobil is positioned to increase dividends on a sustained basis. In addition, the company will have ample financial headroom for inorganic growth or aggressive capital expenditure.
Considering these factors, I am bullish on XOM stock. Once the economic outlook improves, the stock can witness a sharp rally. The level of $65 to $70 is likely to be the long-term technical support zone.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.