If someone told you early this year that you would be able to buy Exxon Mobil (NYSE:XOM) stock for $33, they would have not taken you seriously. They may even have considered you to be, well, off your rocker! But of course, XOM stock is now trading at about half its value since the start of 2020.
The main reason for this is the novel coronavirus pandemic. It has devastated the travel industry but has also resulted in recessions across the globe. And yes, all the major oil operators, like Chevron (NYSE:CVX), BP (NYSE:BP) and Royal Dutch Shell (NYSE:RDS.A), have taken massive hits to their share prices.
Yet even before the pandemic, the oil market was under pressure. There was intense infighting among OPEC members, especially between Russia and Saudi Arabia. There was also the increases in production in the U.S.
However, during the past few months, there has been some stabilization with crude oil prices. But the current levels are still where many producers cannot be profitable. It’s a brutal situation.
But then again, isn’t it during such times that there are opportunities? Could this be a time for a contrarian trade?
Well, I think so – and a good place to start is with XOM stock.
Scale has always been critical with the oil industry. This allows for diversification against the risks of failed projects but also provides for economies of scale. When it comes to selling commodities, having a cost advantage is often key.
As a result, when it comes to XOM stock, the company will be able to survive the tough times. It has a diverse platform that covers:
- Upstream – Over the years, the company has been investing in long-term projects across the globe, such as with deep-water operations in places like Brazil and Guyana. These efforts are likely to mean stronger product growth.
- Downstream – XOM has an extensive network of refineries but also a huge footprint of retail locations.
- LNG (liquified natural gas) – XOM is one of the leaders in this important business.
- Chemicals – XOM generates substantial revenue in markets for things like drilling fluids, tires, packaging, molded parts and piping.
It’s true that all of these businesses have lagged this year. But it is important to keep in mind that there are positive secular trends that should help drive growth. According to the company’s own analysis, the world population will increase by 1 billion by 2030. There are also five people who are entering the middle class every second. In other words, there will be continued demand for affordable energy and chemicals.
In the meantime, the company is taking swift actions to restructure its operations. Consider that the company is reducing its 2020 capex by 30% to $23 billion and there is a cost cutting initiative for a 15% reduction.
Bottom Line on XOM Stock
The dividend yield on XOM stock is a juicy 10.2%. Granted, the belief on Wall Street is that there will be a cut. Actually, it could be announced this week when the company releases it quarterly report (which will be on Friday).
But XOM has a long history of protecting the dividend. After all, the company has made a payout for 37 consecutive years. And even if there is a reduction, the yield is likely to still be competitive.
Besides, it seems that much of the bad news has been factored into XOM stock – and then some. Note that the consensus price target on the shares is $45, which assumes 36% upside from current levels.
But in the next year or so, as the global economy begins to improve – as the vaccines get more prevalent – there will be lots of leverage for Exxon Mobil in its business. And it will not take much for earnings to get juiced again. So an investment right now could prove to be a good move for investors.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is an advisor/board member for startups and author of various books and online courses about technology, including Artificial Intelligence Basics, The Robotic Process Automation Handbook and Learn Python Super Fast. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.