The black swan event that triggered oil’s price crash has shaken energy industry fundamentals. While the worst seems to be over in terms of crude’s price slide, recovery is likely to be gradual. Selective exposure to energy stocks can provide healthy returns through this recovery. Exxon Mobil (NYSE:XOM) stock, for one, bottomed out at $30.10 during the recent market meltdown. Subsequently, the shares have trended higher by 53% and currently trade at $44.12.
I believe that there is more upside for XOM stock in the coming quarters.
I would initiate my discussion with an outlook on oil price and demand. Morgan Stanley believes that oil demand will recover to last-year levels only toward the end of fiscal year 2021. Moody’s is of the opinion that prices can return to $50 to $55 a barrel in the coming year.
Andrei Simonov, Finance department chairperson, Broad College of Business, Michigan State University, had this to say in an email to InvestorPlace:
“In the optimistic scenario, the [worst of the lockdown] crisis is over by June-July, and oil consumption is to follow. However, if we have a prolonged period of lockdown, then the question is how many smaller oil companies can survive (and for how long) … Ultimately, it can be a repetition of late 1990-es with the cycle of low oil prices (circa $10/barrel) — underinvestments — prices going up to $100 in 5-7 years.”
Warren Patterson, head of commodity strategy at ING, believes that the “worst is behind the market now. The main driver behind this assumption is that we should see a gradual recovery in demand over the course of the year.”
Christian Malek, the head of EMEA oil and gas equity research at JP Morgan, has a significantly more-optimistic view. He believes that oil can surge to $100 in the next two years with a “huge amount of supply being removed from the market.”
Overall, these views might indicate that oil can continue to trend higher from current levels. The pace of recovery can vary, but the worst is possibly over.
Reasons to Like Exxon Mobil Stock
Rystad Energy believes that if oil is at $30 per barrel towards the end of FY2021, as many as 170 oil companies can file for bankruptcy. With uncertainties related to oil demand, it makes sense to consider companies that have robust credit metrics.
This is the first reason to like Exxon Mobil stock. As of April 2020, the company had $18 billion in cash coupled with $15 billion in revolving credit facility. This implies a total liquidity buffer of $33 billion. Even with the recent debt issuance to bolster its cash position, the debt-to-capital ratio remains low at 26%. Therefore, even with oil prices trends higher gradually, Exxon Mobil is well positioned from a credit perspective.
Another stock that deserves mention here is Chevron (NYSE:CVX). The company expects its debt-to-capital ratio to remain below 30% even if Brent crude oil trades at $30 through the next year.
Another factor that makes Exxon Mobil attractive is the quality of upstream assets. Just in FY2019, the company had six major deep-water discoveries. In deep-water Guyana, the company estimates 8 billion oil-equivalent barrels (BOE) of recoverable resource. The company was targeting production of 750,000 BOE a day by FY2025 in the asset. With the current crisis, Exxon Mobil now expects to reach these production levels a year later.
It’s worth noting that Exxon Mobil added 26 million acres to its exploration portfolio last year. Of this, 10 million acres were added in Africa alone. This is relevant for the long-term as its likely to translate into proven reserves and production growth in the coming years. With a deep exploration inventory, the outlook is bright for the upstream sector.
Exxon Mobil has been offloading non-core assets. Last year, the company sold assets worth $5 billion. This adds to the financial flexibility.
My Concluding Views on XOM Stock
From a risk perspective, a crisis that extends beyond the next year can impact XOM stock. On an annual basis, the company has a cash outflow of $14.8 billion on dividends. There is risk of dividend cut or suspension if the crisis prolongs. However, I see low probability of this outcome.
Exxon CEO Darren Woods believes that April 2020 was the hardest hit due to the novel coronavirus. Therefore, the worst has already been factored into Exxon Mobil stock price. While results will continue to remain weak in the coming quarters, the focus will be on the credit metrics. On that front, the company is well positioned.
Further, if oil does continue to gradually move higher, the sentiment will turn positive for the industry. It therefore makes sense to accumulate some quality names. Exxon Mobil is certainly attractive from a balance sheet and asset quality perspective.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored more than 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored more than 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored more than 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored more than 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.