Exxon Mobil (NYSE:XOM) has posted healthy share price appreciation over the past three months, amid a 50% rally in oil prices. Although XOM's business model is diversified toward downstream and chemical businesses, a majority of the company's business model is directly linked to oil and gas prices.
Over the past couple years, the company has significantly invested in oil- and liquid-rich plays, all at a time when oil prices hovered near $100 a barrel. The company expanded its overall production beyond 4%, with most of the growth coming from oil and liquid resources.
Unfortunately, the company's plans of profiting from the oil and liquid business failed with the 70% fall in oil prices. In the final quarter of 2015, Exxon's U.S. upstream earnings declined by $2B compared with same quarter of the previous year, while non-U.S. upstream earnings dropped from $2.6B to $1.4B.
Despite notable growth from downstream and chemical business earnings, poor results from upstream business meant that the company's overall earnings decreased by $3.8 billion - a 58% loss - to $2.8 billion in the final quarter of 2015.
Falling oil prices have significantly impacted oil- and gas-related companies, including Exxon Mobil, since mid-2015. However, after bottoming out around $26 a barrel in the beginning of February, oil prices have stunned investors with an unexpected rebound. Following the rally in oil prices, XOM's share price has also surged, growing above 13% in the last three months. In the latest quarter, the company's oil equivalent production increased 4.8% Y/Y, with liquids soaring 14% and only natural gas declining, by 5.6%.
Now investors are wondering if the 13% rally is provided a tasty selling opportunity. Though short-term value investors may well see profits from selling, I don't view the recent rally as an attractive selling opportunity. I suggest investors stick with this stock, in the anticipation of further share price appreciation and ongoing stable dividends.
The company's share price is likely to extend its recent rally in the coming months and oil prices are already set for a fresh rally. After dipping to $26 a barrel in the beginning of February, oil prices have now soared by 50%. In the last two sessions alone, oil prices rose by 8%, amid declining U.S production, falling rig activities and increasing global oil demand. Most promising of all, a group of major players are slated to meet in Doha on April 17. Oil traders are expecting this meeting to play a large part in managing global supply.
The Russian Energy Ministry recently confirmed that oil prices in the range of $45-$50 per barrel will be good enough for them to freeze their production levels. Other producers including Venezuela, Saudi Arabia and the Gulf nations are lobbying to stabilize oil at around $50 a barrel for the short-term. In the past week, U.S. oil inventories declined by 4.9 million barrels. The oil-rig count has been dropping for the past three consecutive weeks and now stands at its lowest level since November 6, 2009.
I strongly believe that XOM is a safe stock on which to ride out the rally in oil prices. Trading near $84 a share, XOM's stock appears undervalued, when we look at its production potential, company cost-cutting, and the expected rally in oil prices. Chevron's stock is still trading well below its 52-week high of $90 a share. The company's cash generation and liquidity situation also appears strong, despite the losses of the past few quarters. In fiscal 2015, XOM generated positive free cash flows of $6.5 billion, at a time when its peers - including Chevron Corp (NYSE:CVX) - posted negative free cash flows.
XOM has sustained its dividends, even in depressed times. Goldman Sachs believes that this company has the potential to increase its dividends above a nominal level this year, thanks to its strong balance sheet. With the anticipated growth in oil prices we can expect further reinforcement to its cash flows and dividends. These gains are likely to be extended as inventories are reduced and demand increases.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.