With fear dominating in the market, it’s time to be greedy. In particular, it’s time to be greedy in sectors and stocks that are more sensitive to sharp economic downturns. I recommend starting with Exxon Mobil (NYSE:XOM) stock.
XOM stock touched a 52-week high of $83.49, but it now trades over 60% lower at $33.
The downside has been in-sync with the massive plunge in oil prices. Even with bearish sentiment prevailing, I believe there are still reasons to consider accumulating shares.
Two events triggered the collapse in oil prices. First, Saudi Arabia launched an oil price war and it’s likely to result in oversupply of oil in the markets. Second, as the coronavirus from China spreads globally, the world economy could plunge into recession. On one hand, supply is increasing and on the other hand, demand has declined.
After discounting these factors, Goldman Sachs believes that oil can decline to $20 per barrel. This is possibly the worst-case scenario and oil currently trades at $24 per barrel. In other words, oil might not have significant downside from its current levels.
It therefore makes sense to buy quality energy stocks at a time when oil seems to be bottoming out. It’s likely that oil trades in the range of $20-$30 per barrel in the first half of 2020. However, stocks are already discounting this factor.
With this perspective on oil prices, I believe that gradual exposure to XOM stock is worth considering.
Why is Exxon Mobil Stock Attractive?
There is little doubt that oil and gas companies have to navigate an extended period of relatively low oil prices. Therefore, the balance sheet is the first point of focus in any analysis.
Exxon Mobil reported total debt of almost $50 billion at the end of 2019. However, the company’s debt-to-capitalization was low at 19%. Further, the company’s operating cash flow for the same period was $29.7 billion.
With robust cash flow, debt servicing is hardly a concern. Even after the recent rating downgrade by S&P Global, Exxon Mobil still commands an investment-grade rating of AA. I want to add here that Exxon is targeting $15 billion in divestment by 2021. This will help with deleveraging in the coming quarters. Strong fundamentals are the first reason to consider XOM stock.
It’s important to note that crude oil is unlikely to sustain prices below $30 per barrel. If the economy recovers in the second half of the year, crude oil is likely to trend higher. The U.S. Energy Information Administration expects Brent to average $43.30 for the year and $55.36 for 2021. Even if recovery is fragile, oil can trend above $40 in the next few quarters.
Exxon Mobil was targeting $30 billion to $35 billion in capital expenditure on an annual basis. With the downturn, the company is looking at capital expenditure and operating expenses reductions. It is entirely likely that the investments are scaled down to the level of operating cash flows. This will ensure that the balance sheet remains strong.
My Final Thoughts on XOM Stock
There is no doubt that Covid-19 has stalled business activity and a global recession is likely in the first half of the year. Further, excess oil supply has added to the woes of energy companies.
However, beyond the current year, the scenario is likely to be positive. I also expect that Russia and Saudi Arabia will be back to the negotiation table at some point in time.
However, it’s still important to accumulate shares gradually. If Exxon Mobil suspends or lowers its dividend, XOM stock would face more risk. While such a move would help conserve cash, investors are likely to respond with knee-jerk reactions.
Overall, these are uncertain times. The coronavirus-driven downtown will go down in the history of financial markets. It makes sense to remain cautious, but some brave exposure to equities can deliver healthy returns in the next 12-24 months.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
