Time To Buy Exxon Mobil

Summary

• Thanks to this market frenzy, you can now get this Dividend Aristocrat/Achiever with a yield of 7%.
• Cash flow from operations covers much more than dividend payments and the company is now ready to enjoy a strong oil market.
• The XOM business model requires continuous reinvestment in new projects to find additional oil.
• Dividend investors have no reason to worry and should enjoy the relatively high yield.

Last week, I've explained why there is such an energy MLPs sell-off. This week, the market got hit by another oil price war. With the OPEC going full production mode, we are on for another oil meltdown. The impact is worse than what happened in 2014 simply because this event is happening at the same time as the growing fear of a recession, thanks to the coronavirus.

Thanks to this market frenzy, you can now get this Dividend Aristocrat/Achiever with a yield of 7%!

Time to buy Exxon Mobil

Business Model

Exxon Mobil (NYSE:XOM) is an integrated oil and gas company that explores for, produces, and refines oil around the world. In 2018, it produced 2.3 million barrels of liquids and 9.4 billion cubic feet of natural gas per day. At the end of 2018, reserves were 24.3 billion barrels of oil equivalent (including 4.2 billion for equity companies), 65% of which are liquids. The company is the world's largest refiner with a total global refining capacity of 4.7 million barrels of oil per day and one of the world's largest manufacturers of commodity and specialty chemicals. It operates its business divisions in North and South America, Europe, the Middle East, North and sub-Saharan Africa, and the Asia-Pacific.

Investment Thesis

XOM is a money-making machine. Cash flow from operations covers much more than dividend payments and the company is now ready to enjoy a strong oil market. Accordingly, Exxon's massive investment in oil sand production in the past was not cheap, but surely boosted XOM's long-term reserve. It allows the company to show about 50% of its 2019 production to come from long-term reserves. This should be a great cash flow source and should support future dividend payments. The company has gone through many challenges throughout its history and shows a stellar dividend history.

Potential Risks

While XOM has proven its ability (many times) to navigate through troubled waters, the company remains dependent of commodity price fluctuations. We see how the oil price affects its share price once again. You may want to catch this high dividend yielder, but beware as a 7% yield is one of the top 3 red flags telling you a company could be a bad pick.

The XOM business model requires continuous reinvestment in new projects to find additional oil. It is a capital-intensive business. Future projects may not be as profitable considering the current state of the oil industry. Profitability also depends on where the oil barrel is trading at.

Dividend Growth Perspective

XOM successfully adapted to a challenging environment. Dividend investors have no reason to worry and should enjoy the relatively high yield. XOM proved it could keep its dividend increase alive even with a low oil barrel price. Shareholders should expect a steady ~4-5% dividend increase each year for the long term, but the next increase may be less generous for obvious reasons. We have recently changed our dividend discount model numbers to reflect the current situation.

Valuation

Speaking of which, we have reviewed the dividend discount model using a lower dividend growth rate and a higher discount rate to reflect additional risk around this investment. You will find interesting that even with a 4% dividend growth rate and an expected return of 10%, XOM shows a great upside potential.

Input Descriptions for 15-Cell Matrix				INPUTS
Enter Recent Annual Dividend Payment:				$3.48
Enter Expected Dividend Growth Rate Years 1-10:				4.00%
Enter Expected Terminal Dividend Growth Rate:				4.00%
Enter Discount Rate:				10.00%
Discount Rate (Horizontal)
Margin of Safety	9.00%	10.00%	11.00%
20% Premium	$86.86	$72.38	$62.04
10% Premium	$79.62	$66.35	$56.87
Intrinsic Value	$72.38	$60.32	$51.70
10% Discount	$65.15	$54.29	$46.53
20% Discount	$57.91	$48.26	$41.36

Click to enlarge

Please read about the dividend discount model limitations before drawing any conclusions.

I don't think we will see XOM trading over $60 rapidly. As long as the oil barrel is trading at such a low level, XOM will go through lots of volatility. However, it's not the first time Exxon Mobil has seen its share price dropping rapidly. It creates a great opportunity for investors who didn't have the chance to include XOM in their portfolio.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Comments

[TheHornet]

It turns out, it wasn't.

[Stoneclone]

.05/share on the way.

[Joey Bag of Donuts]

Hey anybody know where our elites are?

[Kenyatta]

Treasury will soon be issuing some taxpayers (appears those with income less than $70k) a check of $1,000 to stimulate the economy. Last time, under then President Bush, taxpayers received a check of $600. The thinking was that the taxpayers will buy daily living items. Instead, they spent the money gambling. If you receive such a check, think about buying some XOM stock.

[Scott the Robot]

At this point isn't buying XOM no different than gambling?

[hat_trick3]

$1000 on what conditions?
provided it is used for groceries, utilities, rent etc. not crap from China or Netflix, weed, Grubhub and manicures etc.

[Veritas1010]

“Time to Buy”...

For a new entrant as a speculative buy, yes.

To nibble as an ordinary investor, maybe.

But to accumulate now as a pragmatic dividend harvester; I suggest you pass on this presently and I own my fair share at higher prices that would love psychologically to average down - safely - not have capital and income flow vanish for an extended period potentially.

To much risk, not enough reward.

disc.: long $XOM but holding through the firestorm upon us.

[User 48719668]

oki

[crrj]

So-

Interest rates are now at near-zero--- worldwide net negative in the western world.
Xom has AA-rated balance sheet - the same as US govt--cant they pick the bones of small, overleveraged companies? Basically steal assets and market share?
Xom has paid dividends and raised in good and bad times--even Valdez oil spill--

AA-rated balance sheet with historically low rates--does it make sense to slash cap spending by $2-3 Billion a year immediately, sell $5 Billion of 20-year bonds at say 2% (Us govt 10-year treasury is .56%- 30-year treasury is below 1%--bond funds and pensions must buy for yield and ratings) turn around and pay off all debt above 5%, and spend $3Billion buying back stock right now? If in 2-3 years it trades back up to just $80, almost 100% capital ROI plus saving 8% a year on dividends, while maintaining a decades of consistency of dividend?
Doesn't it seem their ROI could be much higher simply buying back their stock than most new project cap spending for the next 3 years? 100% return with 8% minimum dividend savings over 10 years is 18% a year return---can we see the returns of each and every project utilizing capital today? Doubt its 18% net return annually.

These is fun times!!!! Buy the little-bitty, overleveraged ankle-biters Exxon. Or, buy out a pipeline company to transport all your energy products cheaper than competitors. KMI?

[hat_trick3]

You are spot on @crrj
Suspend the dividend today and put that money to work picking off all the carcasses that are sure to pile up in the coming quarters.
This is a no brainer.

[crrj]

no--- keep the dividend going-- the track record of paying in bad times cannot be regained if they cut.

Cut Capital expenditures--no projects are better returns than buying back stock today

just go issue Billions of cheap debt at these historic lows rates, but back expensive debt, and stock, and bankrupt assets

[Old Professor]

I need a stiff drink after reading so many scary comments about XOM--cutting its dividend, a further collapsing of its share price, etc.--but it's just mid-morning where I live, so jogging up and down my street will have to do for now.

[Kenyatta]

Time to buy XOM will be when it cuts dividend. I have read that its dividend is unsustainable, When dividend is cut, the price gets haircut and then is the time to buy.

[Illius]

Investment 101: Never try to catch a falling knife.

Wait until the knife falls and sticks into the wood, vibrates a bit and gets boring.
I won't touch this until it gets boring, and maybe gets a leg or two up.

[GearDownBigShifter]

What has happened to SA? Why are all the comments pure conjecture and speculation now? This isn’t an opinion board it’s an investment site.

[yezz]

$36 and change now. Soon below $30 and dividend cut coming, welcome $15-$20 range and below

[Marto6967]

What makes you think they'll cut the dividend, as opposed to just borrowing cheap money to pay it?

[AEGISBMD]

$38 at close. Thanks Don!

[Kenyatta]

First, the income is not sufficient to pay the dividend. So if money is borrowed cheaply, where is the additional income coming to pay the additional loan debt when the oil price is so depressed?

[Stoneclone]

Don't need 10 pages of tables. Just look at the Stock chart. That tells the entire story.

[olli123]

Down another 10 %. When will it stop to go down??

[Scott the Robot]

@olli123 It (may) stop going down when oil prices stop cratering. People have been saying $20/barrel and we aren't there yet.

[r cohn]

Buy !buy!buy!
Best balance sheet in the industry
Biggest refiner , biggest chemical producer
Trading far below book value

[Klhoush]

Or heading for bankruptcy. Buy Kodak, it’s cheap.

[AEGISBMD]

or Solyndra.

[User 228712]

or Enron

[MoneyPig]

Nat Gas could be be higher, close to 3.00. Currently, it is 1.80.

[MoneyPig]

Integrated oil with split 50/50 gas/production should hold up fine, but will be taken down with the rest. Pure oil plays are doomed.

Novice investors here see production reported in bbls/day, but they forget the gas volumns pumped per day are converted to bbls/day.

Oil adds far more the profits than refining (3-5% EBITDA). Refining adds huge numbers to revenue, but oil/gas are the most profitable.

[MoneyPig]

You need to understand the oil/gas weighting of upstream revenues. If gas prices are stable, then only the oil revenues tank.

That thick oil, it is not cheap to pump. I wouldn't put that in the good column.

Too, trading operations can hit refining revenues hard in the first two quarters.

In a way it makes sense Russia is both an oil and gas seller, and just finished two 80 bcm pipelines to European markets where it supplies 50% of all gas. So, why not through the oil producing Saudis/tight oil under the bus.

[crrj]

Why not force the Europeans to buy US nat gas, regardless of price vs communist Russia? EU owes the US $150 Billion annually in trade--I suspect the US buys much more product from Germany than Russia---So heir Merkle---this ain't Obama/bush/clinton---either buy our nat gas, or we force you thru 150% tariffs to build every Audi/VW/Mercedes/Fiat/Porche plant in the US to match our auto purchases from you-- or just buy our nat gas----

Simple--we just want you to be "fair-equal" in trade with your US allies--We no longer want to subsidize you or the other socialists programmed EU citizens--

Not being ugly--we just love LEGAL US citizens, and after 25 years of massive trade imbalances of Trillions in your favor---we want EQUAL--- either buy our nat gas, or we tariff ALL your goods to help incentivize you to be "fair"--

[Vandooman]

Worst article of the year. Do not touch XOM with a barge pole.

[Dzida Securities]

Why? State your case!

[Kenyatta]

Possible dividend cut.

[rob123]

Expect dividend cut and/or asset sale. These metrics are simply unsustainable, especially when there is no end in sight for the Russia-Saudi showdown. I expect a bunch of naysayers....but, just remember two things....(1) nothing ever happens, till it actually happens and (2) there is a first time for everything.
Not too long ago, I mean just a dozen years ago, stalwarts in their respective industries had to cut their dividends just to survive!

[pharout73]

Stop buybacks....