With Russia and Saudi Arabia agreeing to end their price war, oil prices will likely trend higher in coming quarters. Longer-term investors can therefore consider buying the shares of oil companies with strong fundamentals, including Exxon Mobil (NYSE:XOM). As a result of the novel coronavirus crisis, Exxon Mobil stock has declined significantly, creating a good opportunity for longer-term investors.
It’s clear that oil-producing nations cannot sustain their budgets with oil at $30-$40 per barrel. As a result, production cuts will be implemented, causing oil prices to gradually trend higher. Global demand for oil has slumped, and demand probably won’t recover meaningfully this year. However, Exxon Mobil’s strong balance sheet will enable it to withstand several quarters of relatively low oil prices.
The United States, with a population of 330 million, typically consumes 19.96 million barrels of oil per day. China, with a population of 1.3 billion, typically consumes 13.57 million barrels per day. India, with a population of 1.2 billion, typically consumes 4.34 million barrels per day.
On its way to greatness, the U.S. faced the Civil War, World War I, the Great Depression and World War II. Amidst their own challenges, China and India will also continue to grow. As oil consumption grows in these countries over the long-term, the overall demand for oil will be robust.
Exxon’s Upstream Segment Will Drive Growth
Exxon Mobil’s key EBITDA and cash flow driver is its upstream segment. I am bullish on this segment’s growth due to the quality of its assets.
Exxon’s deep-water Guyana asset is likely to be a game-changer in the coming years. The company has 8 billion barrels of recoverable resources there. Exxon Mobil expects to extract more than 750,000 barrels per day there in 2025. Further, the company’s discovered resources in Guyana have been increasing since 2015, increasing the certainty of its growth outlook.
In deep waters off of Brazil, Exxon Mobil has 2.5 million net acres. The company plans to drill on 60% of the area. Planning to launch exploration wells there this year and next year, Exxon Mobil will see its stock trend higher if the firm is as successful in Guyana as it was in Brazil.
Investors might question how profitable offshore assets will be when oil prices are so low. However, the latest data from Transocean’s (NYSE:RIG) presentation shows that the prices at which offshore producers break even have been declining. For the current year, offshore producers are expected to break even at $34 per barrel. Therefore, as oil trends higher in coming years, these deep-water assets can deliver strong cash flows.
In the Permian Basin, Exxon Mobil is positioned for strong growth in the years to come. Last year, the company’s production rose 80% to 272,000 oil-equivalent barrels per day. With an inventory of 8,000 well locations and 10 billion oil-equivalent barrels of recoverable resources in Exxon’s Permian acreage, the outlook of the asset is promising.
Exxon Mobil is likely to benefit from strong production growth in its upstream segment once oil prices trend higher. That will, in turn, result in EBITDA margin expansion and free cash flow growth.
Exxon’s Strong Fundamentals Will Support Its Investment Plans
As of the end of last year, Exxon Mobil’s debt-to-capital ratio was 19.1% and it had a net debt-to-capital ratio of 18.1%. Since the company has ample room to borrow more and had $3.1 billion of cash as of the end of last year, the company is well-positioned to navigate the crisis.
For 2019, the company reported operating cash flow of $29.7 billion. It’s likely that its operating cash flow will decline meaningfully in 2020. However, Exxon Mobil’s cash flows are positioned to grow in the coming years through higher production.
The company plans to invest $30 billion to $35 billion annually over the next five years. Even as it reduces its investments this year, I believe that its capital expenditures in the coming years can be largely financed with internal cash. That will keep its balance sheet strong, even with its high level of investments.
My Final Views on Exxon Mobil Stock
Investors need to remain cautious as the world faces a situation that’s worse than the financial crisis of 2008-2009. However, the best time to buy stocks is when panic and fear are prevalent and strong. Therefore, now is a good time to gradually buy quality stocks, and Exxon Mobil stock is an attractive name.
It’s worth noting that the company has a dividend of $3.48 per share and a dividend yield of 8.07%. It probably won’t cut its dividend, and income investors can consider buying the stock.
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.
