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Exxon Mobil: More Pain Ahead, With The
Oil Game Likely Over (Rating Upgrade)
24 June
2023
By
Juxtaposed Ideas
Summary
-
XOM has declined by -9.4% since our previous Sell rating, with more
volatility ahead due to the uncertain WTI spot prices and Powell's
pessimistic commentaries.
-
The US SPR inventory continues to dwindle to 350M as well, with
lower levels likely being the new normal post-pandemic.
-
The oil rally may be over, with analysts
projecting a moderation in XOM's top and bottom line through FY2025,
despite the ramp-up in its production output.
-
Meanwhile, existing investors can hold on to
the dividend aristocrat for its forward dividend yield of 3.54% and
fixed dividend raises.
-
However, due to the minimal upside potential to
our price target, we do not recommend anyone to add here.
![](images/images_06_26_2023/pic2.jpg)
HAYKIRDI/iStock via Getty Images
The Oil Investment Thesis Is
Less Attractive, With The Hyper-Pandemic Rally Over
We previously
covered Exxon Mobil Corporation (NYSE:XOM)
in March 2023, ending the article with a sell rating. True enough, it
had declined by -7.9% at the time
of writing, or -9.4% at its worst. Even so, the gap between the stock
prices and declining WTI crude oil spot prices further widened,
suggesting more volatility ahead.
XOM 20Y Stock Price
![](images/images_06_26_2023/54998043-16874009223682096.png)
Trading View
Given
how XOM historically correlated closely to the WTI, the widening gap
might be reminiscent of the same cadence in 2015, as the stock
maintained much of its optimism as the spot prices cratered by nearly
-70%.
However, we doubt that the same case study may apply here, since it
may be nearer to the 2008 cadence, with the stock belatedly closing
the gap by 2010, before
resuming the previous correlation afterward.
OPEC+ and Saudi Arabia's production
cuts seemed to be non-events as well, with the spot prices still
in a general malaise compared to the hyper-pandemic heights of $114
per barrel. For now, the former still expects the global oil demand to
rise by
2.35M barrels per day or +2.4% YoY in 2023, with the oil spot
prices likely supported at $70s due to the total production cuts of
3.66M barrels per day through 2024.
To add more uncertainty to the mix, the US SPR
continues to dwindle to
350M barrels by June 21, 2023 (-2.2%
MoM/ -30.6% YoY). This is a surprising cadence indeed, compared to
the 634.96M recorded by December 27, 2019.
While the US government has previously pledged to
refill the SPR by June 2023, it remains to be when that event may
actually occur, given their preferred contract prices of between $67
and $72 per barrel, with the WTI trading at
$72.48 per barrel at the time of writing.
Even then, we are uncertain where the federal
funding may come from. While the debt ceiling has been recently raised
again, for the
79th time since 1960, government spending may be tight from
henceforth, likely putting the refilling of the SPR to a lower
priority.
We believe that the lower SPR inventory may
eventually be the new normal after the pandemic, especially due to
Powell's pessimistic
commentary about the slower path toward a 2% inflation rate,
compared to the 4% reported in the
May 2023 CPI.
So, how will these developments impact XOM moving
forward?
We suppose XOM may sustain its execution, with it
reporting FQ1'23 revenues of $84.18B (-12% QoQ/ -4.3% YoY) and Free
Cash Flow generation of $10.92B (-7.6% QoQ/ inline YoY).
It is apparent that the normalization in spot
prices has contributed to the moderation of its top and bottom line
expansion, despite the improved production volume of 3.83M oil
equivalent Barrels per day (inline QoQ/ +4.3% YoY) by the latest
quarter.
However, investors need not fret since the
hyper-pandemic and Russian-war-induced windfall has also allowed XOM
to improve its balance sheet tremendously to net debts of $6.5B by the
latest quarter (-31.7% QoQ/ -79.4% YoY), compared to the peak level of
$41.14B in FQ4'20.
Combined with the $19.62B of shares repurchased
over the past six quarters, the management has already retired 174M of
shares, or the equivalent of 4% of its shares outstanding at the same
time. This is on top of the $14.89B of dividends paid out over the
last twelve months (inline sequentially), with the share retirement
allowing an increase in its dividends paid out per share by +3.4%.
Unfortunately, we share the market sentiments
that the oil rally may already be over, with analysts already pricing
in moderation in XOM's top and bottom line at CAGR of -7.3% and -13%
through FY2025, respectively.
This cadence is naturally attributed to the
potential normalization of oil prices to the pre-pandemic levels of
$60s over the next few years, despite the increase in its production
output to
1.2M bbl/day from Guyana and
1M boe/day from the Permian, up by +233% and +78.5% from FY2022
levels of 360K bbl/day and 560K boe/day, respectively.
Therefore, we suppose the optimism surrounding
the oil prices has already peaked, with market sentiments likely to
moderate from henceforth.
So, Is XOM Stock A Buy, Sell, Or
Hold?
XOM NTM P/E Valuations
![](images/images_06_26_2023/54998043-16874217127247772.png)
S&P Capital IQ
For now, XOM continues to trade optimistically at
an NTM P/E of 11.42x, against its 1Y mean of 9.39x. The same has been
observed with its oil/gas peers, such as Chevron (CVX)
at 11.78x and Occidental (OXY)
at 11.42x.
XOM 1Y Stock Price
![](images/images_06_26_2023/54998043-16874009223682096.png)
Trading View
Then again, despite the recent pullback, there is
minimal upside potential from current levels to our price target of
$105.86, based on XOM's NTM P/E and the market analysts' FY2025 EPS
projection of $9.27.
In addition, thanks to the recent market
uncertainties, the stock has been retesting its December 2022 and
March 2023 support levels over the past few weeks, suggesting more
volatility ahead. If those levels are breached, we may see it head to
the $90s in the near term, implying an -11% downside from current
levels.
As a result, we prefer to rate the XOM stock as a
Hold (Neutral) here. Existing investors may continue holding on to the
dividend aristocrat, due to the decent forward dividend yield of 3.54%
and fixed dividend raises thus far. However, we do not advise anyone
to add here, since the payouts may not cover the potential losses from
the decline in its stock prices.
Green Play Ammonia™, Yielder® NFuel Energy.
Spokane, Washington. 99212
509 995 1879
Cell, Pacific Time Zone.
General office:
509-254
6854
4501 East Trent
Ave.
Spokane, WA 99212
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