Exxon Mobil - long-term hold

Ticker: XOM

Author: Stock Analyst  Date: 2021/05/19

Exxon Mobil is the largest US oil and gas company by market capitalization and the second largest in the world. Exxon has a diversified portfolio of assets in the oil and natural gas upstream and downstream, petrochemicals and LNG sectors.

We rate Exxon Mobil Hold with a target price of $ 67.6. Potential in the long term 12 months. is 8.7%, and including dividends - 14.3%.

Exxon Mobil has been raising dividends for 37 years and is a dividend aristocrat. Dividend yield over the next 12 months expected at 5.6%.

The company is optimizing operating expenses, which, together with the implementation of new projects, should bring in $ 8-11 billion of additional operating cash flow in 2025 relative to the company's forecast for 2021.

About 90% of new projects pay off when oil prices are less than $ 35 per barrel, which makes the company competitive even in the event of a decline in oil prices.

Since the invention of the coronavirus vaccine in November 2020, Exxon Mobil shares have grown by 90%, which, in our opinion, limits further upside.

Company description

Exxon Mobil is the largest American oil and gas company. At the moment, it is the second largest public oil and gas company in terms of capitalization after Saudi Aramco. Exxon produces about 3.8 mmbp. n. e. oil and natural gas per day. The company's mining assets are located in more than 40 countries. In addition to the upstream, the company is active in the segments of oil refining, petrochemicals and LNG production.

Industry trends

The oil market continues to recover from the pandemic. Prices have already fully recovered and are now trading higher than before the pandemic, namely close to $ 70 per barrel.

It is important to understand that the rise in prices does not mean a complete recovery of the market from the effect of the pandemic. The main driver of price growth was the OPEC + restriction, which is currently removing about 8 million bpd from the market, taking into account the voluntary production cut by Saudi Arabia. At the same time, since May, OPEC + has been increasing production by 350 thousand b / d, and in June and July will increase production by another 350 thousand b / d and 450 thousand b / d, respectively. In addition, Saudi Arabia plans to gradually abandon its voluntary production cut by 1 million bpd by July. In the short term, oil prices also keep the summer season approaching, when demand for gasoline has traditionally been growing.

Given the explosive growth in coronavirus cases in individual countries, including India, which is the world's third largest buyer of oil, the increase in production in May will show the stability of the current equilibrium in the oil market. At the same time, the US Department of Energy still expects a full recovery in demand only in the first half of 2022.

Additional threats to the balance in the oil market should be considered the possibility of an increase in shale oil production in the United States, where drilling activity has been growing due to stable high prices over the past few months, as well as the conclusion of a nuclear deal with Iran, a condition for which may be the lifting of sanctions from the outside and the return Iranian oil to the world market.

Attractiveness factors

  • Exxon Mobil is one of the most dividend-paying companies in the oil sector and the US market in general. Dividend yield in the next 12 months is expected to be 5.6% and in 2-3 years may move to growth with stable oil prices.
  • The management is actively working to optimize costs, as a result of which for the period 2021–2025. operating cash flow may grow by $ 8-11 billion. Growth in operating cash flow with a moderate level of investment may become the basis for an increase in dividends and a reduction in debt burden.
  • Exxon Mobil is a leader in the American and global oil and gas sector, which gives the company the opportunity to participate in projects anywhere in the world and always have access to cheap financing. In particular, in 2020, this allowed the company not to reduce the level of dividends.
  • Reduced investment in exploration and drilling by oil and gas companies around the world creates long-term prospects for higher oil prices and an increase in the market share of companies adhering to the strategy of developing classic oil and gas projects.

Risk factors

  • The main risk factor is a decline in oil prices due to increased production from OPEC + or other oil producers.
  • In the long term, oil demand could fall faster than expected if the transition to renewables occurs quickly enough.
  • Pressure from ESG investors and regulators could force Exxon Mobil to spend more on greenhouse gas emissions and other green initiatives.
  • The lack of opportunities for significant production growth limits the potential upside, given the stability of oil prices.

Financial results

Exxon Mobil started to improve its financial results in the first quarter. Adjusted net income per share rose 22.6% YoY to $ 0.65. Revenue increased by 5.2% YoY to $ 59.1. Both parameters were 7-9% above the consensus, which allowed the oil stocks to rally after reporting.

Among the positive factors in the first quarter, management notes an increase in oil prices, a gradual recovery in refining and petrochemical margins and optimization of operating expenses. The results were negatively affected by a 6.4% reduction in hydrocarbon production and abnormal cold weather in February, the impact of which is estimated at $ 600 million.

Exxon Mobil increased its operating cash flow by 47.6% on the back of revenue and profit growth. This, together with a sharp decrease in capex, made it possible to reduce net debt by $ 3.4 billion over the quarter. At the same time, debt remains at a higher level than a year ago, which is associated with an increase in borrowing in a difficult 2020.

Overall, financial results for the first quarter look positive. Exxon Mobil was able to show investors that at current oil prices, the company is able to generate enough free cash flow to both pay dividends and reduce debt.

Valuation

To evaluate the company, we used the multiples valuation method relative to peers, which gave a target capitalization of $286.3 billion, or $67.6 per share.

This corresponds to an upside of 8.7% on a 12-month horizon. and a Hold rating. Including dividends, the upside is 14.3%.

Note that the weighted average target price for a sample of analysts with a historical performance of forecasts for this stock above the average is, according to our calculations, $ 67.43 (upside - 8.4%), the stock rating - 3.14 (rating value 5.0 corresponds to the recommendation Strong Buy, and 1.0 is Strong Sell).

This includes the estimate of the target price of Exxon Mobil shares by Credit Suisse analysts at $ 69.0 (recommendation - Neutral), Wells Fargo - $ 65.0 (Buy), MKM Partners - $ 68.0 (Buy).

Stock market performance

Since the beginning of 2020, Exxon Mobil shares have performed marginally worse than its main closest counterpart, the US oil and gas major Chevron and the XOP oil and gas ETF. In our view, this dynamic is due to the fact that investors were not confident that Exxon Mobil would be able to generate enough free cash flow to maintain a high level of dividends while continuing to invest in development. Now, against the backdrop of positive financial results, Exxon Mobil shares have almost caught up with the sector and, in our opinion, will move at the level of their peers in the near future.

Technical analysis

Technically speaking, Exxon Mobil shares are trading in a medium-term uptrend. The nearest resistance in the current situation is the previous local maximum at $64. Support is located at the 50-day moving average at $58.