Exxon Mobil - Long Positions To Pay Off

About: Exxon Mobil Corporation (XOM), Includes: BP, RDS.A
by: Aisha Rahman

In a statement, Fundstrat confirmed that XOM was poised to face better times ahead as it successfully passed the quality screening.

The International Energy Agency has reported that the oil market seems to be moving into a re-balance.

I don’t see a reason for shareholders to be alarmed following the S&P downgrade. Of course it is something to note, but it shouldn’t trigger a short position in XOM.

I had done a piece on Exxon Mobil (NYSE:XOM) late last month declaring it to be a good pick for investors who seek a stable stream of income. I also stated my optimism about oil price recoveries serving the company well during this year and beyond. Consider this piece as continuation to my stance, with just a bit more backing.

Fundstrat gives XOM a thumbs up, IEA sees the market moving back into balance

Lagging oil equities have been a concern for investors since oil prices began heading south. However, things seem to be getting better for some oil majors, including XOM. In a statement, Fundstrat confirmed that XOM was poised to face better times ahead as it successfully passed the quality screening. While that alone is news enough to boost investor confidence in XOM's bright future, additional confirmation from the IEA that the oil market seems to be rebalancing makes it a lot easier to predict that the XOM will be bullish by the end of this year and going forward as well.

I see that Fundstrat's screening of XOM serves as a good confidence boost for investors to jump on the bandwagon and invest in this oil major. The indication about the oil market by IEA just reaffirms what Fundstrat has predicted for oil majors including XOM. Oil price recoveries will do well to benefit the entire oil industry as many companies are set to benefit from the rebound, but I believe that XOM has a number of positives (a number of projects with different timelines) that gives it the upper hand compared to a lot of other companies out there. To top that off, the dividend is consistent and generous with this one, which leaves little doubt in my mind about why anyone would not want to begin investing in XOM if they plan on taking any exposures in oil and gas in the current time.

XOM downgraded based on leverage

S&P downgraded the outlook for XOM based on its high debt levels, questioning the sustainability to the impact on cash flows if the company continues to maintain it high dividend payout. S&P has downgraded XOM's rating amid concerns of pressures on cash flow despite the oil major's cut back on capital expenditure. Looking at the numbers, the company did have a high financial leverage ratio of 1.97 in 2016, with the number coming in at 1.94 in the latest quarter.

In my opinion, while the downgrade may be justified based on the amount of debt XOM has accumulated on its balance sheet coupled with the depressed oil environment, it also has a lot of positives going on for itself that will play out well for it in the future. Just to mention a few of them - gaining exploration acreage in Equatorial Guinea, beginning operation at the new plastic plant, expanding downstream operations in Mexico. I firmly believe that as these projects begin coming online, they will uplift XOM's earnings and ease off pressures from it's cash flows, eventually overcoming the problem of financial distress that S&P has based its downgrade on.

Secondly, I'd like to look at the bigger picture when I evaluate this downgrade and say that nearly every oil major has been hit with piles of debt on its balance sheet and lower cash flows. Compared to its peers, XOM has still managed to exercise some level of control over its leverage situation, where it carries the lowest amount of debt on its balance sheet (I used Morning Star to compare debt levels for Exxon Mobil, British Petroleum (NYSE:BP) and Royal Dutch Shell (NYSE:RDS.A)). Keeping all that in mind, I believe that these debt levels are not something to be concerned about when it comes to XOM - in fact, it's actually impressive how the company has managed to keep debt in a check relative to its peers, resulting in a better leverage ratio as well.

In short, I don't see a reason for shareholders to be alarmed following this downgrade. Of course it is something to note, but it shouldn't trigger a short position in XOM - at least not when the company seems to have some strong building blocks strengthening its fundamentals for the future.

The final verdict

When I had written my article at the end of last month, share prices for the stock were trading in the $82/share range. Currently, the share trades marginally lower at ~$81/share. The dip in share prices experienced at the beginning of June was a good opportunity for investors to cash in on. But if you missed it, I don't think that is a problem. I believe that this stock will pursue an upward trend and will gain momentum when oil prices rebound. I will maintain my stance as per my previous analysis and am looking at the stock being bullish, achieving a price target of at least $88 per share over the next 12 months or so. This is likely to bring terrific value growth for investors who are looking for capital gains out of their investments. The high dividend yield of 3.84% is definitely a bonus for shareholders who are looking for a stable stream of dividends from this dividend champion. So regardless what you are looking for at the moment, long XOM for the dividend and the capital gain which, frankly speaking, doesn't seem too far away from now.

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.