Exxon Mobil: Buy This 6.1% Yielding Energy Champ Today
Summary
- The reopening of the US economy and recovering crude prices could fuel XOM's free cash flow.
- Exxon Mobil Corporation just posted its first profit in more than a year.
- Free cash flow recovery in FY 2021 signals potential for a dividend raise.
With energy prices rebounding and the US economy set to reopen, Exxon Mobil Corporation (NYSE:XOM) is a buy. The firm just posted its first profit after more than a year and free cash flow is surging. Exxon Mobil Corporation could raise its dividend.
The US energy sector is in the middle of a comeback
The first quarter 2021 officially put Exxon Mobil Corporation back on the map after crude prices and energy demand strengthened. The energy sector is roaring back amid a prolonged recovery in crude prices and Exxon Mobil is a big winner here with more potential for growth and higher earnings ahead.
Exxon Mobil lost $22.4b in FY 2020, a year that saw a historic drop of crude oil to minus $37 a barrel. But crude prices have seen an incredible rebound since April of last year, which fundamentally reshaped Exxon Mobil's earnings and free cash flow situation.
Crude fell to its historic low on April 2020 and WTI now costs above $60 a barrel again.
(Source: Oilprice.com)
Exxon Mobil profits from this recovery in oil prices … which is fueled by an improving short-term economic outlook as the US gets ready to reopen its economy for business again.
The first quarter was an important milestone for Exxon Mobil because the firm’s financial results attest to returning strength in the business. The last quarter was the first quarter since 2019 in which Exxon Mobil reported a profit. It was also the first quarter in which the US upstream business didn’t record a loss … but a profit of $363m after a year of losing money ...
2021 | 2020 | ||||
Earnings (Loss), $M | Quarter 1 | Quarter 4 | Quarter 3 | Quarter 2 | Quarter 1 |
Upstream | |||||
United States | $363 | -$16,803 | -$681 | -$1,197 | -$704 |
Non-US | $2,191 | -$1,729 | $298 | -$454 | $1,240 |
Total | $2,554 | -$18,532 | -$383 | -$1,651 | $536 |
Downstream | |||||
United States | -$113 | -$514 | -$136 | -$101 | -$101 |
Non-US | -$277 | -$697 | -$95 | $1,077 | -$510 |
Total | -$390 | -$1,211 | -$231 | $976 | -$611 |
Chemical | |||||
United States | $715 | $461 | $357 | $171 | $288 |
Non-US | $700 | $230 | $304 | $296 | -$144 |
Total | $1,415 | $691 | $661 | $467 | $144 |
Total earnings before corporate & financing | $3,579 | -$19,052 | $47 | -$208 | $69 |
Corporate & financing | -$849 | -$1,018 | -$727 | -$872 | -$679 |
Net income/(loss) | $2,730 | -$20,070 | -$680 | -$1,080 | -$610 |
(Source: Author)
The turnaround in Exxon Mobil’s US upstream profits is due to the price recovery in the energy market and a big margin improvement.
Exxon Mobil’s realization table shows that the crude price realized in the 1st quarter 2021 increased 158% compared to the second quarter 2020 … to $56.20/b. Realized prices for crude in the first quarter also exceeded the average price of $55.61/b that was recorded just before the pandemic, in the fourth quarter 2019.
(Source: Exxon Mobil Corporation)
The recovery in the energy market has fueled a very real rebound in Exxon Mobil’s free cash flow, which surged to $6.9b in the first quarter 2021.
Material free cash flow recovery could drive XOM's revaluation
The firm’s free cash flow turned negative the first time at the onset of the pandemic and reached a low of negative $5.1b in the second quarter 2020. Going from minus $5.1b to plus $6.9b within just four quarters shows the enormous distress energy companies have been in last year.
2021 | 2020 | ||||
$B | Quarter 1 | Quarter 4 | Quarter 3 | Quarter 2 | Quarter 1 |
Cash Flow from Operating Activities | $9.3 | $4.0 | $4.4 | $0.0 | $6.3 |
Proceeds from Asset Sales | $0.3 | $0.8 | $0.1 | $0.0 | $0.1 |
Cash Flow from Operations and Asset Sales | $9.6 | $4.8 | $4.5 | $0.0 | $6.4 |
PP&E Adds / Investments & Advances | -$2.7 | -$4.1 | -$3.8 | -$5.1 | -$6.5 |
Free Cash Flow | $6.9 | $0.7 | $0.7 | -$5.1 | -$0.1 |
(Source: Author)
Because the US economy is about to reopen, energy consumption is only going to go up, which potentially creates a path for Exxon Mobil to sustain its free cash flow recovery. If the first quarter was any indication of how business will turn out in 2021, Exxon Mobil could look at $15-20b in free cash flow in FY 2021, not including any asset sales.
Stronger generation of free cash flow in FY 2021 has a big implication for the firm’s dividend policy because Exxon Mobil stopped growing its dividend last year amid an unprecedented drop in company free cash flow.
Risks to the firm’s free cash flow are decreasing, however, not growing after the rebound in crude prices. But should the US economy double-dip or energy prices decrease materially this year, not only will Exxon Mobil not raise its dividend but such a scenario would pressure the stock again.
Under the assumption that crude price will remain between $60 and $70/b in 2021 … Exxon Mobil could raise its dividend and continue its pre-pandemic history of growing its dividend. The firm paid $3.7b to shareholders in the 1st quarter 2021 or just 54% of free cash flow. XOM's dividend has remained at $.87-share for nine quarters now and could see a bump as soon as management has the confidence that business is returning to normal. Whether or not management raises its dividend, XOM is a buy based on yield alone.
With $15-20b in potential free cash flow in FY 2021, XOM trades at 12-16x FCF but the firm has huge potential to grow its top line, and higher prices fuel margin growth. If FY 2021 turns out to be as good for XOM as the first quarter was, Exxon Mobil is poised to collect closer to $28b in free cash flow -- and this means XOM only has a P-FCF ratio of 8.6x which is a fair deal!
The material rebound in free cash flow and the revaluation of XOM it could start are the biggest reasons to buy Exxon Mobil now, besides the 6.1% yield the stock pays. Long term, the growth opportunity in this field is potentially Exxon Mobil’s biggest growth opportunity.
Risks
Should crude prices fall again, however, then Exxon Mobil Corporation's free cash flow is likely to decrease as well, possibly reversing valuation gains made since last year. A double-dipping US economy also poses material risks to Exxon Mobil's recovery potential -- especially if the US upstream business starts to record losses again.
Closing thoughts
Exxon Mobil Corporation, for the first time since the fourth quarter 2019, reported a profit because of a rebound in crude prices and margin improvements. The firm’s free cash flow surged last quarter -- for the same reason. If this momentum continues, management should be able to deliver a dividend increase and XOM could revalue higher.
This article was written by
Analyst’s Disclosure: I am/we are long XOM. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (220)
I believe that you nailed it and well stated of course.It is unfortunate that Uncle Joe is so ingrained in his own anti-Trump methodology to eliminate all of the things good or bad that President Trump did during his 4 years that he is throwing the baby out with the bath water. I understand that they are going to maybe build more wall:
Biden considers building more wallBiden is now walking back his proclamation statement that his administration will not build border walls.
He is reportedly considering a return to construction of the southern border wall in order to fill in gaps that undocumented aliens took advantage of when construction was halted.
Smugglers send groups of illegal crossers through the gaps to overwhelm the agents. When agents leave to intercept or apprehend one group, another one dashes across.
According to reports, DHS Secretary Alejandro Mayorkas explained that the president has ended funding based on Trump’s emergency declaration, but this leaves room for work on areas of the wall that need renovation and “particular projects that need to be finished.”thehill.com/...It also look like Colonial Pipeline paid the ransom to allow opening up the pipeline and that Biden said "no comment"
Will this be the incentive to restore the xl pipeline ? Well , my opinion is NO, unless we have other instances, but that is a hard decision for him to make ( unfortunately I don't think he makes any decisions ) . Anyway
Great Post.Allday
For the many who caught the stock when it was cheap and are now enjoying the upswing, let us all hope it continues, but always be cautious and pay attention. For the negative posters....well they do provide a certain level of humor until their messages are deleted and than they have one more reason to complain. There is a measure that they look forward too and that is the message count, as it seems to be a benchmark for achievement or in some cases knowledge.
GLTAAllday
BUT
XOM is down from highs around June 20, 2014 by about 40%;
KHC is down from highs around February 17, 2017 by about 55%.Whilst the DJIA is up somewhere in the neighborhood of +95% since June 2014, and about +66% since February 2017.ETF and/or index investments would have far exceeded singular investments in either stock!While there have certainly been shorter-term opportunities in each for decent returns, you all preach on!
Hope it continues to go up just looked at price $ 58.62....
At least for today a good move makes mu cost basis for 740 shares at 46.74
not as good as some but I can live with that .Allday
Well I am only concerned about me and all the other so-called experts, pendents who feel they know everything don't know me. I do not claim to know everything and I make mistakes sometimes daily, but I try my best. The only prize is the self satisfaction that occurs if you win, and if you lose and we all do have losers, is to be accountable and move on. I do not tell others how to invest or make recommendations, but I do rejoice in success. Thanks for the comments.Allday
interesting. I think it will be 25 years or more until EVs > 50% of vehicles on road
But now that its almost doubled in shareprice and activist investors piled onto this company like maggots pile on a corpse,now we get articles about buying bags.
Heck nah.
Dividend yield and stock appreciation will be best for many years. XOM stake in Iraq is 32%
Iraq is willing to buy and XOM is willing to sell to
PAY OFF DEBT. Imagine price jump when news will come out.
Long it now.
