Despite Continued Declines, Consider Exxon Mobil Stock a Cautious Buy

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Is buying Exxon Mobil (NYSE:XOM) stock like trying to catch a falling knife? Yes and no. On one hand, with the oil patch still in a rough patch, and the company borrowing to maintain its dividend, it’s hard to see the situation improving in the near-term.

XOM stock
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On the other hand, one can argue the proverbial “other shoe” has already dropped. How so? The stock has already been kicked out of the Dow Jones Industrial Average. News of worse-than-expected third-quarter losses has already hit the street. While the dividend remains “as-is,” investors have basically priced in a potential dividend cut, given its forward yield is now in double-digit territory.

Simply put, the worst may already be priced into shares. With this in mind, a contrarian position may be worthwhile at today’s prices. Sure, it may take a while for Exxon to get out of the doghouse. But, now could be the “darkest before the dawn” moment for this hard-hit oil stock.

With the stock market rebound after March’s novel coronavirus crash, it’s may be too late to dive into the many winning stocks of 2020. Big tech sold off in September, but largely remains “priced for perfection.” Much of the rebound in blue chip stocks has already happened as well.

For potential outsized gains, investors need to look at the sectors that have yet to bounce back. And, with its prospects still murky, the energy space may be where said opportunities could hiding in plain sight.

Is It ‘Darkest Before Dawn’ for XOM Stock?

As InvestorPlace’s Wayne Duggan discussed Oct 5, you can argue Exxon Mobil stock is a value trap. With a 10.3% forward dividend yield, shares may look tempting. But, the risk of paper losses may far outweigh future cash dividends.

Yet, what if there’s another way to play XOM stock? Beyond just buying it for the yield, and hoping it doesn’t head lower? I’m talking about the potential for the company’s operating performance to improve in the coming year.

It’s possible.. If we finally reach pandemic “recovery mode” in 2021 (vaccine available, social distancing rules relaxed), demand for petroleum products (gasoline) should start heading back to normal.

Sure, with other factors at play, it may be far-fetched to think oil can quickly rebound to the $60s per barrel range in the next twelve months. But, even if oil recovers back to $50 per barrel? That small improvement could be all it takes to put some points back into Exxon stock.

Even if shares only bounce back to the “false-recovery” price levels we saw in early June (between $50-$55 per share), coupled with the fat dividend yield that’s still worthwhile upside potential.

Yet, while 2021 may be a better year for XOM stock, what about the meantime? Granted, there are a few risks that could potentially send shares lower. But, given these risks are manageable, as well as largely priced into today’s share price, these issues may not be as bad as investor sentiment implies.

It Won’t Take Much For Shares to Head Higher

While I believe the other shoe has dropped, I concede there are factors that could send shares lower from here.

Firstly, third-quarter losses could be higher than expected. Wall Street projections call for losses around 7 cents per share. But, the company’s guidance says losses could be as high as 68 cents per share. How is this the case? Increased exploration and production (E&P) earnings aren’t enough to counter higher losses in the natural gas, refining, and logistics segments.

Secondly, the dividend cut risk. While I believe today’s share price already prices-in a negative chance to the payout, shares could still head lower if what’s been feared finally happens.

So, will these two factors send shares lower in the near-term? Regarding the guidance change, with the company setting such a low bar, even lukewarm performance could exceed expectations.

What about the dividend? Sure, with Exxon borrowing to maintain the payout, a cut/suspension seems inevitable. Yet, analysts at Wells Fargo recently pointed out the company can maintain its current dividend payout through 2023.

In short, with investors expecting the worse from this company, it may take just a breadcrumb of positive news to send the stock higher from here.

Not A Screaming Buy, But Still Worth A Look

As I discussed last month, those looking for high-yield and rebound potential should consider MLPs (master limited partnerships) rather than regular oil and gas stocks. Yet, compared to names like Occidental Petroleum (NYSE:OXY), the risk/return proposition with Exxon Mobil looks to be more in your favor.

The company has a long way to go when it comes to bouncing back. But, given so much bad news remains priced-in, patient investors may find opportunity here.

Bottom line: tread carefully, but consider XOM stock a buy at today’s prices.

On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.

Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


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