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Should You Buy, Hold, or Sell ExxonMobil (XOM) Post Q2 Update?
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Exxon Mobil Corporation (XOM - Free Report) recently made a Form 8-K disclosure, stating that soft natural gas prices — resulting from reduced demand and surplus inventories — are expected to have negatively impacted its second-quarter 2024 earnings. Additionally, its announcement regarding diminished refining margins exacerbates apprehensions about second-quarter earnings performance.
The critical question now facing investors is how to strategically position themselves regarding the stock. Before addressing this, let's review some fundamental aspects of ExxonMobil.
Strong Permian & Guyana Presence
With a strong focus on strengthening its presence in the Permian, ExxonMobil completed the acquisition of Pioneer Natural Resources Company on May 3. With 1.4 million net acres of the combined company in the Delaware and Midland basins, having an estimated 16 billion barrels of oil equivalent resource, ExxonMobil has greatly transformed its upstream portfolio.
The company expects that based on 2023 volumes, its production from the most prolific basin will more than double to 1.3 million barrels of oil equivalent per day (MMBoE/D). For 2027, the energy giant expects its Permian production volume to increase to 2 MMBoE/D.
Similar to its operations in the Permian, ExxonMobil boasts a robust project pipeline in offshore Guyana resources. The company is well-positioned to generate significant returns from both the Permian and Guyana due to low production costs in these assets. With oil prices remaining favorable this year, ExxonMobil is strategically poised to generate substantial cash flows from its upstream operations, which contribute the majority to its total earnings.
Integrated Business Model & Robust Balance Sheet
Due to its integrated business model, ExxonMobil is well protected when oil price turns low. This is because, apart from exploration and production activities, the company has an extensive footprint in refining and chemical businesses.
During uncertain times, ExxonMobil can rely on its robust balance sheet. Compared to the industry composite stocks, which have a debt-to-capitalization ratio of 24.2%, ExxonMobil maintains a much lower ratio at 15.9%. Favorable commodity prices have enabled it to enhance its financial position and repay the debt incurred during the pandemic. Chevron Corporation (CVX - Free Report) is another integrated energy giant with a strong balance sheet. Belonging to the same industry, Chevron has a much lower debt-to-capitalization ratio of 11.9%.
BP plc (BP - Free Report) , another major player in the integrated energy space, is also reducing its debt load backed by higher oil prices and decreased capital spending. BP’s debt-to-capitalization ratio is much higher at 38.4%.
Image Source: Zacks Investment Research
Entry Into the Lithium Market
In addition to its traditional upstream and downstream energy operations, ExxonMobil is entering the lithium market, a critical component in electric vehicle batteries. The world is demanding more lithium to meet the growth in electric vehicles, and XOM is thus well-positioned to gain in the long run.
On Jun 25, ExxonMobil signed an agreement with SK On to supply up to 100,000 metric tons of lithium from its upcoming project in Arkansas. SK On will utilize this lithium in its U.S.-based electric vehicle battery manufacturing facility.
Keep an Eye on the Stock
ExxonMobil, carrying a Zacks Rank #3 (Hold), maintains a robust and diversified business model, which will enable it to continue returning cash to shareholders. Over the past 41 years, XOM's dividend payments have grown at an average annual rate of 5.8%.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
These positive developments are evident in the year-to-date price performance of XOM's stock. During this period, the company has appreciated 12.9%, outperforming the 7.7% increase of the industry.
Image Source: Zacks Investment Research
It is evident that while ExxonMobil expects challenges such as soft gas prices and unfavorable industry margins to affect second-quarter earnings, the company's long-term outlook remains promising. However, investors are advised against rushing to add the stock to their portfolios at present and should instead await a more opportune entry point.
This is because, at this moment, shares are somewhat expensive on a relative basis, with the current 6.15X trailing 12-month Enterprise Value/Earnings before Interest Tax Depreciation and Amortization staying above the 6.12X five-year median. Also, the company is trading at a premium to the broader industry average of 3.95X.
Image Source: Zacks Investment Research
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Should You Buy, Hold, or Sell ExxonMobil (XOM) Post Q2 Update?
Exxon Mobil Corporation (XOM - Free Report) recently made a Form 8-K disclosure, stating that soft natural gas prices — resulting from reduced demand and surplus inventories — are expected to have negatively impacted its second-quarter 2024 earnings. Additionally, its announcement regarding diminished refining margins exacerbates apprehensions about second-quarter earnings performance.
The critical question now facing investors is how to strategically position themselves regarding the stock. Before addressing this, let's review some fundamental aspects of ExxonMobil.
Strong Permian & Guyana Presence
With a strong focus on strengthening its presence in the Permian, ExxonMobil completed the acquisition of Pioneer Natural Resources Company on May 3. With 1.4 million net acres of the combined company in the Delaware and Midland basins, having an estimated 16 billion barrels of oil equivalent resource, ExxonMobil has greatly transformed its upstream portfolio.
The company expects that based on 2023 volumes, its production from the most prolific basin will more than double to 1.3 million barrels of oil equivalent per day (MMBoE/D). For 2027, the energy giant expects its Permian production volume to increase to 2 MMBoE/D.
Similar to its operations in the Permian, ExxonMobil boasts a robust project pipeline in offshore Guyana resources. The company is well-positioned to generate significant returns from both the Permian and Guyana due to low production costs in these assets. With oil prices remaining favorable this year, ExxonMobil is strategically poised to generate substantial cash flows from its upstream operations, which contribute the majority to its total earnings.
Integrated Business Model & Robust Balance Sheet
Due to its integrated business model, ExxonMobil is well protected when oil price turns low. This is because, apart from exploration and production activities, the company has an extensive footprint in refining and chemical businesses.
During uncertain times, ExxonMobil can rely on its robust balance sheet. Compared to the industry composite stocks, which have a debt-to-capitalization ratio of 24.2%, ExxonMobil maintains a much lower ratio at 15.9%. Favorable commodity prices have enabled it to enhance its financial position and repay the debt incurred during the pandemic. Chevron Corporation (CVX - Free Report) is another integrated energy giant with a strong balance sheet. Belonging to the same industry, Chevron has a much lower debt-to-capitalization ratio of 11.9%.
BP plc (BP - Free Report) , another major player in the integrated energy space, is also reducing its debt load backed by higher oil prices and decreased capital spending. BP’s debt-to-capitalization ratio is much higher at 38.4%.
Entry Into the Lithium Market
In addition to its traditional upstream and downstream energy operations, ExxonMobil is entering the lithium market, a critical component in electric vehicle batteries. The world is demanding more lithium to meet the growth in electric vehicles, and XOM is thus well-positioned to gain in the long run.
On Jun 25, ExxonMobil signed an agreement with SK On to supply up to 100,000 metric tons of lithium from its upcoming project in Arkansas. SK On will utilize this lithium in its U.S.-based electric vehicle battery manufacturing facility.
Keep an Eye on the Stock
ExxonMobil, carrying a Zacks Rank #3 (Hold), maintains a robust and diversified business model, which will enable it to continue returning cash to shareholders. Over the past 41 years, XOM's dividend payments have grown at an average annual rate of 5.8%.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
These positive developments are evident in the year-to-date price performance of XOM's stock. During this period, the company has appreciated 12.9%, outperforming the 7.7% increase of the industry.
It is evident that while ExxonMobil expects challenges such as soft gas prices and unfavorable industry margins to affect second-quarter earnings, the company's long-term outlook remains promising. However, investors are advised against rushing to add the stock to their portfolios at present and should instead await a more opportune entry point.
This is because, at this moment, shares are somewhat expensive on a relative basis, with the current 6.15X trailing 12-month Enterprise Value/Earnings before Interest Tax Depreciation and Amortization staying above the 6.12X five-year median. Also, the company is trading at a premium to the broader industry average of 3.95X.