Case Study on Exxon Mobil (XOM) with Nobias technology
Summary
Year-to-date, there are only two sectors with positive gains: energy and utilities.
XOM shares are up by 50.44% on a year-to-date basis.
After this strong rally, credible authors and analysts remain bullish on shares; the average price target amongst credible analysts calls for 11.85% upside moving forward.
The energy sector has been the big winner thus far throughout 2022. Year-to-date, there are only two sectors with positive gains: energy and utilities. The utility sector has posted gains of 3.7% during 2022 thus far. However, energy has put those returns to shame, posting year-to-date gains of 43.95%. And, within the energy space, Exxon Mobil (XOM), one of the world’s largest integrated oil companies, has posted even greater outperformance. XOM shares are up by 50.44% on a year-to-date basis. Yet, credible analysts still see double digit upside ahead.
The Alpha Sieve, a Nobias 4-star rated author, recently published a report which highlighted XOM’s bull and bear case theses at Seeking Alpha. On the bullish side, The Alpha Sieve said, “XOM is in an admirable position at the moment as they were prescient enough to still invest $13bn in exploration and development activities in 2020 when most other competitors were laying low.” They continued, “On account of that foundation, XOM has been able to ramp up production with great alacrity and take advantage of the attractive average realizations that have been prevalent in the energy space in 2022.”
XOM Sep 2022
The author noted that “On account of the elevated price realizations this year, and the volume uptake that XOM has been witnessing, cash flow generation too is a highly attractive facet (last year XOM generated $48bn in operating cash flow and intends to generate another $40bn this year).” This profitability has resulted in very attractive free cash flow multiples.
The Alpha Sieve wrote, “The strong operating cash flow generation also enables Exxon to comfortably meet its CAPEX requirements leaving ample FCF. Incidentally, at the current share price, Exxon's FCF yield is at an impressive level of 12.6%, the highest it's been in 10 years, and exactly 3x higher than its 5-year average.”
Furthermore, Exxon’s strong profits has allowed the company to repair its balance sheet in recent years. The author stated, “It's also fair to say that Exxon has the balance sheet to withstand a prolonged down cycle (if it were to happen, which is not the base case). Last year they paid down $20bn worth of long-term debt (and this year they intend to pay down another $2bn), and currently, their debt to capital ratio is only at 20%, which is at the lower end of their target range of 20-25%.”
However, taking a look at bearish arguments, The Alpha Sieve highlighted negative growth expectations in the coming years and XOM’s troublesome forward valuation multiples. They said, “For instance, in FY23, consensus estimates point to an EPS of only $10.48 (FY24: $8.65), this would imply annual de-growth of ~17%. In effect, the declining trajectory of the EPS base makes the XOM stock an expensive proposition on a forward P/E basis.”
The author continued, “At the current share price, an FY23EPS of $10.48 translates to a forward P/E of 8.72x, which is 48% greater than the 5-year average forward P/E multiple of 5.9x.” And in conclusion, The Alpha Sieve offered a cautious take on XOM shares after the stock’s 50%+ year-to-date rally, stating, “whilst Exxon Mobil currently appears to have the wind in its sails and a lot of attractive qualities, at this relatively elevated price point, I wouldn't be too enthused to commence a long position in XOM stock. I rate Exxon Mobil stock as a HOLD.”
Daniel Thurecht, a Nobias 4-star rated author, also recently published a report focused on Exxon at Seeking Alpha. Thurecht’s work was focused on the company’s success in the gas space. He wrote, “Even though oil prices often dominate the discussion surrounding Exxon Mobil, gas still forms a sizeable portion of their production. During the first half of 2022, their total oil and gas production was a massive 3.704mboe/d of which 2.282mboe/d was oil and associated liquids, as per their second quarter of 2022 results announcement. This means their gas production was 1.422mboe/d and thus comprises a formidable circa 38% of their total production, which largely stems from their once controversial acquisition of XTO Energy back in 2010.”
Thurecht viewed this move as a hedge against technological innovation and demand destruction in the oil markets. He stated, “Since oil demand sees threats from electric vehicles, it means that a portion of demand destruction from high prices will never return as more consumers are pushed towards electric vehicles in response to crippling fuel prices.”
Regarding Exxon’s gas success, Thurecht said, “Even though gas prices were climbing during 2021, they were turbocharged during 2022 as Russian troops marched into Ukraine and set off a pivotal geopolitical shock that will shape the continent for decades to come. The ride is never smooth but despite this inherent volatility, gas in the United States prices are now consistently trading for over $9mmbtu for the first time in over a decade, helped along by the world scrambling to secure LNG supply.”
He continued, “Since gas sees very strong fundamentals following the Russia-Ukraine war, it creates very profitable prospects for Exxon Mobil whose once maligned gas production is now poised to benefit through feeding the increased demand for United States LNG to Europe.”
Ultimately, Thurecht said, “In my view, this actually represents a far greater opportunity for Exxon Mobil than what is offered by high oil prices because in the case of gas, it actually represents a structural change in the global energy market that stands to perpetually into the future for decades to come.”
However, even with the long-term growth tailwinds that gas provides in mind, like The Alpha Sieve, Thurecht concluded his piece with a neutral outlook on shares, writing, “thus with their share price near record highs, I believe that a hold rating is appropriate.”
Shareholder returns have attracted investors - especially income oriented investors - to the energy sector for decades. High dividend yields are often at the center of a bullish XOM thesis. The stock currently yields 3.68%, which is well above the S&P 500’s 1.46% yield.
And, as Alex Kimami, a Nobias 4-star rated author recently pointed out in an article published at oilprice.com, with profits soaring, these strong shareholder return trends are likely to remain in place. Kimami wrote, “According to data from Bernstein Research, the seven supermajors–including ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), BP (NYSE: BP) and Shell (NYSE: SHEL)--are poised to return $38bn to shareholders through buyback programmes this year, with investment bank RBC Capital Markets putting the total figure even higher, at $41bn.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
With specific regard to Exxon Mobil, he continued, “Exxon Mobil Corp. has been using the strength of its balance sheet to return significant capital to its shareholders via dividends and share buybacks and has announced plans to continue such distributions going forward.”
Kimami stated, “Exxon returned $7.6 billion to shareholders during the second quarter through dividends and share buybacks, with $3.9 billion for share repurchases and $3.7 billion going into dividends. Year-to-date, Exxon has repurchases amounting to $6 billion and eyes repurchasing up to $30 billion shares through 2023.”
Although The Alpha Sieve and Thurecht offered a “hold” rating on shares, 70% of recent articles published by credible authors (individuals who have received 4 or 5-star ratings by the Nobias algorithm) on XOM shares expressed a “Bullish” bias.
4 out of the 6 credible Wall Street analysts that Nobias tracks that have expressed an opinion on Exxon Mobil believe that the company’s shares are headed higher. Currently, the average price target being applied to XOM shares by these credible analysts is $106.5. Today, XOM trades for $96.50. Therefore, this average price target implies upside potential of approximately 11.85%.
Disclosure: Nicholas Ward has no position in any stock mentioned in this article. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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