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Is ExxonMobil (XOM) a Buy, Hold, or Sell After Q2 Earnings?
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This month, Exxon Mobil Corporation (XOM - Free Report) reported robust second-quarter 2024 earnings, driven by increased upstream production, improved crude oil realizations and the positive impact of the Pioneer acquisition. Notably, record production in offshore Guyana and the Permian Basin, the most prolific in the United States, continues to bolster the bottom line of this large integrated energy major.
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.
Permian & Guyana: Pillars of XOM’s Success
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 & Solid 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 oil-energy sector composite stocks, which have a debt-to-capitalization ratio of 36.17%, ExxonMobil maintains a much lower ratio at 13.5%. Favorable commodity prices have enabled it to enhance its financial position and repay the debt incurred during the pandemic.
Image Source: Zacks Investment Research
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 12.64%.
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 40.08%.
Venturing Into 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.
Monitor This Stock Closely
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 19.9%, outperforming the 5.1% increase of the sector.
Image Source: Zacks Investment Research
However, the recent merger with Pioneer Natural, while enhancing ExxonMobil's production capacity, introduces potential risks in an already oversupplied market. This additional supply could exacerbate existing inventory surpluses, potentially leading to future oil price declines as production ramps up. Such market dynamics could adversely impact ExxonMobil's profitability and stock price stability.
Despite these concerns, the company’s long-term outlook remains strong, but investors are advised to be cautious. Instead of rushing to add XOM to their portfolios, it may be prudent to wait for a more opportune entry point. This is because, at this moment, shares are somewhat expensive on a relative basis, with the current 6.36X trailing 12-month Enterprise Value/Earnings before Interest Tax Depreciation and Amortization staying above the 6.11X five-year median. Also, the company is trading at a premium to the broader sector average of 3.12X.
Image Source: Zacks Investment Research
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Is ExxonMobil (XOM) a Buy, Hold, or Sell After Q2 Earnings?
This month, Exxon Mobil Corporation (XOM - Free Report) reported robust second-quarter 2024 earnings, driven by increased upstream production, improved crude oil realizations and the positive impact of the Pioneer acquisition. Notably, record production in offshore Guyana and the Permian Basin, the most prolific in the United States, continues to bolster the bottom line of this large integrated energy major.
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.
Permian & Guyana: Pillars of XOM’s Success
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 & Solid 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 oil-energy sector composite stocks, which have a debt-to-capitalization ratio of 36.17%, ExxonMobil maintains a much lower ratio at 13.5%. Favorable commodity prices have enabled it to enhance its financial position and repay the debt incurred during the pandemic.
Image Source: Zacks Investment Research
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 12.64%.
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 40.08%.
Venturing Into 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.
Monitor This Stock Closely
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 19.9%, outperforming the 5.1% increase of the sector.
However, the recent merger with Pioneer Natural, while enhancing ExxonMobil's production capacity, introduces potential risks in an already oversupplied market. This additional supply could exacerbate existing inventory surpluses, potentially leading to future oil price declines as production ramps up. Such market dynamics could adversely impact ExxonMobil's profitability and stock price stability.
Despite these concerns, the company’s long-term outlook remains strong, but investors are advised to be cautious. Instead of rushing to add XOM to their portfolios, it may be prudent to wait for a more opportune entry point. This is because, at this moment, shares are somewhat expensive on a relative basis, with the current 6.36X trailing 12-month Enterprise Value/Earnings before Interest Tax Depreciation and Amortization staying above the 6.11X five-year median. Also, the company is trading at a premium to the broader sector average of 3.12X.