Investors are wondering if Exxon Mobil Corporation (NYSE:XOM) can rise above trends roiling the energy sector, considering whether to wait for crude prices to rebound before placing bets on oil majors. But if you believe generally in the strategy of “buy low, sell high” now’s the time to own XOM stock.
Oil prices are down almost 20% since hitting a 2017 high close of $57.01 in January. Lingering concerns about global supply last week caused oil prices to fall to their lowest this year, with WTI Crude closing at $45.96 — down more than 6% since two weeks ago. But XOM’s share price, which which pays a 3.77% annual dividend yield, has not reflected the improvements the company has made.
Nor has the market priced in the earnings growth Exxon management is working to deliver with strategic operational improvements.
While the near-term outlook for oil prices might not look good, Exxon is here to stay. XOM stock — which closed Friday at $81.81 — is priced at just 18 times fiscal 2018 earnings-per-share estimates of $4.51. With an eye on 16% growth, Exxon Mobil shares should reach $95 to $100 in the next 12 to 18 months, delivering 17% to 23% returns.
Oil Majors Pressured
Exxon produced 4.2 million barrels of oil equivalent per day (BOPD) in the first quarter, 4% below the year-ago period.
Headwinds in the energy market, which have sent the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) down more than 14% this year, have also pressured shares of leading oil majors. Chevron Corporation (NYSE:CVX), BP plc (ADR) (NYSE:BP) and ConocoPhillips (NYSE:COP), have fallen 10.79%, 6.8% and 10.59%, respectively.
It doesn’t appear as if industry improvement plans by OPEC, including talks of production cuts, will immediately change the course. Still, it’s tough to ignore the buying opportunity this lingering scenario — albeit a frustrating one for energy investors — creates for those interested in XOM stock. The International Energy Agency predicts the oil glut will end in late 2017, which should boost the price of crude.
Exxon, the Texas-based integrated oil giant, gets roughly 83% of its earnings from its operations outside the U.S. It continues to make moves that can pay significant dividends in the quarters and years ahead. The company’s three main operating segments — upstream, downstream and chemicals — have helped the its profits to remain positive throughout the drop in oil prices.
Exxon delivered a strong first quarter earnings report, with the highest quarterly profits in more than a year.
With its 2016 acquisition of InterOil and last month’s purchase of a refining and petrochemical plant in Singapore owned by Jurong Aromatics — boosting its output and ability meet demand in Asia — Exxon’s expanded puts it in a good position to meet react when the oil market rebounds.
These acquisitions follow earlier deals, including Exxon’s $2.8 billion purchase of a 25% stake in a natural gas project offshore of Mozambique. With $5 billion in cash on the balance sheet and another $25 billion in operating cash flow, Exxon continues to bet on itself. And for these reasons, XOM stock deserves some patience.
Bottom Line for XOM Stock
Aside from the safety investors receive in XOM stock’s 3.77% yield, the company’s strong upstream assets gives Exxon the sort of advantage it needs to deliver significant shareholder returns once the inevitable recovery in oil prices emerge.
That, combined with Exxon’s solid downstream and chemical assets, which due to lower input costs, delivered some $50 billion in profits in the last five years, shows the extent to which Exxon can make the best out of a bad situation.
As such, lower oil prices — in the near term — haven’t punished XOM stock to the extent weaker companies have been buffeted. When oil does rise, XOM has the assets in place to capitalize from the recovery.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
