Exxon Mobil: Get Paid To Wait
- Exxon is set to benefit from rising oil prices over the next few years. Earnings will more than double in the next 5 years.
- Exxon is focused on reducing emissions while remaining heavily profitable. Committing $15 billion towards low-carbon investments over the next 5 years.
- Exxon is reducing its leverage which will help free up more cash to return to shareholders between dividends and buybacks in 2022 and beyond.
Exxon Mobil (NYSE:XOM) remains one of the world's largest oil companies, and also one of the world's most debated. I have been both bearish and bullish on Exxon in the past. But right now, I am bullish given the current oil situation. Exxon is set up very well thanks to its world-class portfolio. That portfolio is only going to get more efficient as Exxon is committed to cleaning up the balance sheet a bit and growing cash flow. All while making sure their green targets are hit well ahead of schedule. Exxon may not see the huge capital gains some of the mid-caps will see over the next year, but it will be around for years to come and you can collect a healthy dividend while you wait.
The Case For $80+ Oil?
At this point, it is no longer a secret that the world is in an "energy crisis". I want to break down a few of the causes very briefly. Let me start with what's happened with the recovery from COVID. We saw demand drop faster than ever before sending oil prices sub $0. Companies cut CAPEX and lowered production as they were losing money on every barrel they produced as there was nowhere for it to go. Now we are seeing the opposite as demand is rising once again, but supply isn't rising at the same pace as seen below. Refer back to your basic ECON 101 class from school, and you'll see why we have seen such drastic price fluctuations.
We saw the US and President Joe Biden try and manipulate the market to help ease the pain at the pump for many Americans. Shockingly, his ratings are sliding as inflation increases, and gas prices climb. The pleading Biden did work, and we saw OPEC+ continue with the plan to increase production by 400,000 barrels in January. There was a thought that they may pause production for fear of another supply glut due to the new COVID variant.
Politics triumphs over economics. Consumer countries mounted enough pressure....But weaker prices now will only mean stronger later."
- OPEC observer Gary Ross
Lastly, we are seeing a reduction in oil & gas investment. Both from government, and general investors. What is ironic here, is that although governments block pipelines and continue to make it harder for these companies to operate, they insist they are not at fault for higher gasoline prices. I think we all agree the world needs to shift gears, the disagreement is on the timeline. Oil is far from dead as we do not currently have enough alternative production to stop producing oil. If these governments continue to make it a challenge for companies like Exxon to do their job, it is going to continue to put a collar on supply, which in turn will keep prices elevated far longer than most are anticipating.
(Source: Bison Interests)
What's Going To Push Exxon Higher?
So what does this mean for Exxon? In short, higher oil prices means a higher stock price. But let's look at what they are doing operationally to capitalize on the potential next leg up in oil. I've been negative on Exxon in the past, but I do like what I see below.
(Source: Company Presentation)
We are seeing a common trend here amongst all oil companies with regards to targeting increased cash flow and using it to pay down debt and reward shareholders. This is done by minimizing costs, keeping CAPEX in check, and boosted by strong commodity prices. Looking below, we can get a grasp of what the next few years could look like. Keep in mind, most analysts are using numbers around $60-$65 for oil when making these predictions. If we get the oil prices I anticipate, these numbers will get a boost. But what we can take from it is a relatively stable business. CAPEX is going to increase slightly, but they will be very particular about where they spend that money. What we will see this year, is around $43 billion in cash from operations, which is the highest since 2014. Most importantly, doing so with less than half the CAPEX.
If I can give Exxon credit for anything, it is the long-term view they always focus on. Many do get caught up in the short-term (myself included), and that can be a dangerous game. When you have a portfolio containing Guyana, and Permian, and rather large stakes in both, the sky is the limit in a bullish oil environment. Looking below, we can see what I mean when I talk about the long term. They are forecasting pretty big numbers coming down the pipe and doing so with essentially zero oil price growth. I do think this is smart when looking longer term, given how volatile and unpredictable the oil price can be long-term. We're looking at more than a double with regards to earnings growth from 2019 to 2025, how can you not like that?
(Source: Company Presentation)
Sticking with long-term thinking, Exxon realizes that the move towards being green is only getting closer every day. They are committing ~$15 billion in lower-carbon investments from 2022-2027. They are already taking massive steps in this direction as they met the emission reduction requirements for 2025 in 2021.
Looking ahead to 2030, Exxon plans on being net-zero in Scope 1 and 2 greenhouse gas emissions for all operated unconventional assets in the Permian Basin by 2030. This is part of their goal to reduce total emissions by 40-50% by 2030 from 2016 levels. They will achieve this in the Permian by:
- Utilizing low-carbon electricity, which may include renewables, hydrogen, natural gas with carbon capture and storage or other emerging technologies
- Accelerating methane emissions detection
- Eliminate routine flaring
- Upgrading equipment
Taking a focus like this is important. The companies that will prove to last the longest in the changing global environment will be the companies that are currently investing in green technologies such as Exxon is. If you have as long a time horizon as Exxon does, you will be able to sleep well at night while holding Exxon.
How's The Dividend?
Growing. While it may not be at the pace it once was, the stock itself isn't growing at that pace either. You do need two to tango efficiently. That said, at 5.75%, it's not a bad place to park some cash for some easy returns. If the company managed not to cut in 2020, there's no way they are going to cut in 2022. I argued pretty heavily for a cut like we saw many companies offer. But Exxon decided to pile on more debt to ensure the dividend was covered to keep shareholders happy. Looking back, I hope they can see why what they did was the wrong decision.
Multiple companies that cut their dividends, are now introducing buyback programs, or have already bought back shares. Instead, we saw Exxon's leverage ratio move up as high as 5x in 2020 on an annual basis, which is quite high when you consider the company tends to keep its ratio well below 1x. Looking below, we can get a grasp of exactly what the debt has looked like over the years, and what it's expected to look like down the road.
The good news here is that investors will still likely get buybacks. The question is just around when. All we have been told is they will begin buying back in 2022 with $10 billion over 12-24 months. So long as they can continue to pile up cash flow, and pay down debt, it is only a matter of time. If we get the $80+ environment in 2022, we could even see the current plan get boosted, which would be very bullish.
At the end of the day, the dividend itself makes the stock attractive. It's in the right sector and there will be capital gains as well so long as oil cooperates. If it doesn't, it will likely trade pretty flat and you can comfortably collect the dividend while we wait for the next leg up in the oil markets.
What Does The Price Say?
As I mentioned, I do not think there is as much "torque" in Exxon as there are some of the midcap names that I have written about over the last few weeks. But, as you just read, the dividend is strong and only going to increase. So, if you want a stock that will move less, but still grows your capital gains in a booming energy environment, that pays a solid dividend, Exxon is for you. Looking below, we can see that Exxon has pretty well reached its fair value at this point. Although, I do currently have a price target of $75.00 on the stock over the next year.
So why buy now? Well, the 200-day moving average has been a very good signal for tops and bottoms over the last few years. Looking below, we can see that it has marked key pivot points multiple times. The good news is we just recently had a nice bounce off of the moving average on December 20th, and we aren't even 5% above where the moving average currently sits. What this allows, is for one to take a pretty heavy position in the stock and be able to set a pretty tight stop.
My current stop on the stock would be $56.41. Roughly 8% from current levels. Looking below we can see that this is right around support. The reason I wouldn't go lower to the previous low of around $54.00, is simply that if my current stop breaks, we are probably headed there anyway and one could look to rebuy on a good bounce from those levels. Protecting capital is the name of the game. If I can sell high and buy back lower, why not?
Looking below, you will see an excerpt of part of a previous article I wrote on Exxon regarding the gap I have circled both above and below. On December 20th, we saw exactly this happen. Keep an eye out for gaps like this on all your stocks, more often than not the gap gets filled eventually, and typically rebounds nicely from there. Especially when you mix in a strong indicator like the 200-day moving average. The crystal ball works well every once in a while.
(Source: Graham Grieder, Seeking Alpha)
As for the road to $75.00, I predict it will be anything but smooth sailing. The first major level the stock has to break through is ~$66.45. Looking below at a weekly chart, we can see the price history here dating back as far as 2011. We have already failed this level once, will we fail it again? I do think a fail on the next attempt could be bearish in the short term, but a breakthrough with a positive re-test would be very bullish. Beyond $66.45, there are a few pockets of support around $70-$72, but nothing near are as instrumental as the $66.45 resistance.
So long as the oil environment remains positive heading into 2022/23, I am quite positive we will see $75.00 at some point. If not, there is a solid dividend to get paid while we wait, and good price support near the current entry point. Technically speaking, I am bullish on Exxon.
As you can see, if you are looking for some easy income and a stock that is in the right sector for 2022, you can't go wrong with Exxon. The company is now focusing on the right things after making some questionable choices during the heat of the pandemic. They will continue to grow earnings while taking care of the environment which will separate them from the pack in the long run. Happy New Year! All the best in 2022.
This article was written by
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