The latest slump in energy prices may have you concerned about diving into names like ExxonMobil (NYSE:XOM) right now. XOM stock has already moved lower in response to the pullback in crude oil prices.
The price of oil may seem as if it has more room to drop, especially with headlines suggesting increasing supply and dropping demand. This in turn may point to more drops ahead for this integrated oil stock. Still, it’s not set in stone that it will fall from here.
Why? Crude oil prices remain well above levels seen a year ago. There are still a lot of factors at play that could keep them elevated. Not only that, as I’ve discussed in past coverage of XOM stock, there are other catalysts at play that could provide it with more runway. Taking all of this in account, this latest pullback may be a buying opportunity.
XOM Stock and Crude Oil Prices
As InvestorPlace’s Shrey Dua reported June 17, several factors have put pressure on energy prices, and in turn, prices of energy stocks like ExxonMobil. First, as the chances of a recession increase, there’s a concern that an economic downturn would dent gasoline demand.
Second, the latest data from the U.S. indicated that domestic oil production is going up. Increased supply, of course, could also put pressure on prices. Again though, before you view this as a reason to skip on XOM stock, there’s still much that suggests otherwise.
That is, other factors could outweigh softening domestic demand and increased domestic supply. Increased demand from China as it exits its recent pandemic lockdowns could provide support for prices. On the supply side, the International Energy Agency (IEA) predicts supply will lag demand through next year. This too could also keep crude oil prices elevated.
ExxonMobil’s current valuation already discounts how long prices stay near record high. At today’s prices, it trades for 9.4 times forward earnings. If crude oil remains at triple-digit levels for longer-than-expected, shares could bounce back from their recent slide. That’s not all. On a longer timeframe, other catalysts may help drive further gains.
More Than Just a Way to Play High Energy Prices
You may still think XOM stock is simply a way to gain exposure to energy prices either staying high or perhaps move higher. But there are other factors that could help it surge in the long-term. So, what are its other catalysts besides high energy prices?
Well, for one, there are its moves into clean energy. Recently, I talked about some of the company’s clean energy projects. In particular, I noted its further move into carbon capture technology. ExxonMobil anticipates this could be a $4 trillion per year market by 2050.
Alongside this, its smart capital allocation efforts also stand to increase shareholder value in the coming years. Namely, its cost savings efforts. Management anticipates that, by 2023, it’ll achieve annual cost savings of $9 billion compared to 2019.
Besides increasing its profitability, and in turn its valuation, this means more cash to return to shareholders. For example, ExxonMobil could boost its already high-yield dividend (a forward yield of 4.1%). It also has a share repurchase plan underway. More cash flow will go a long way in enabling it to buy the maximum amount ($30 billion worth) of shares allowed by its current buyback plan.
The Verdict on XOM Stock
ExxonMobil stock earns an “A” rating in my Portfolio Grader. This is one of the better opportunities out there if you’re bullish on energy prices. Even if you don’t think that oil could hit new highs, there’s still reason to be bullish on shares for the long-term.
A full return of oil prices back to prior year levels don’t not appear likely. Despite talk of a recession-fueled drop in demand, or increased supply, other factors may counter this. Assuming oil stays at or near current levels, there are two other catalysts at play.
Further moves into clean energy technology could enable it to diversify from being solely a fossil fuels company. Management’s greater emphasis on capital allocation also has a strong chance of resulting in solid returns for shares.
Don’t view its latest drop as a reason to sell. Instead, seize the opportunity and buy XOM stock.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article