Dean Mouhtaropoulos
Elevator Pitch
I continue to rate Exxon Mobil Corporation’s (NYSE:XOM) shares as a Buy.
In my prior August 9, 2022, update for XOM, I came to the conclusion that Exxon Mobil is an excellent investment candidate for income-focused investors based on criteria such as yield and growth.
With this article, I turn my attention to catalysts which could sustain Exxon Mobil’s positive share price momentum in 2023. I have decided to maintain a Buy rating for Exxon Mobil, in view of the fact that re-rating catalysts like larger-than-expected share buybacks and above-expectations profitability will drive XOM’s stock price up next year.
Why Has Exxon Mobil Stock Gone Up This Year?
Exxon Mobil’s stock has performed extremely well this year thus far. In 2022 year-to-date, XOM’s shares have gone up by +60.6%, while the broader market as represented by the S&P 500 fell by -21.9% over this period.
High energy prices and earnings beats have been supportive of XOM’s strong stock price performance this year.
There are expectations that energy prices will remain elevated for the foreseeable future. Seeking Alpha News highlighted on October 5, 2022 that OPEC+ has made the decision “to cut production by two million barrels a day.” This move by OPEC+ prompted analysts from both Goldman Sachs (GS) and Morgan Stanley (MS) to predict that Brent crude will rise above $100/bbl at the very least in the near term, as indicated in an October 6, 2022 Seeking Alpha News article.
High energy prices have translated into above-expectations earnings for Exxon Mobil. XOM’s non-GAAP adjusted Q2 2022 earnings per share, or EPS, beat the market’s consensus forecast by +7.5%. Also, Exxon Mobil’s disclosures as part of its recent 8-K filing released on October 4, 2022 point to the company delivering an estimated EPS of approximately $4 for the third quarter of 2022, which is around +16% above what the market had anticipated earlier.
XOM Stock Key Metrics
The key metrics for XOM that investors should pay attention to are the comparison in share repurchases between the company and its closest peer, Chevron Corporation (CVX).
CVX has guided that it will spend as much as $15 billion on share buybacks this year, which is roughly equivalent to an expected buyback yield (share repurchases divided by market capitalization) of 4.8%. In comparison, Exxon Mobil boasts a relatively lower expected buyback yield of 3.6% based on its target of executing on share repurchases worth $30 billion for 2022 and 2023 ($15 billion on an annualized basis).
XOM’s buyback yield is inferior to that of CVX now, so an unexpected increase in Exxon Mobil’s future share repurchases could be one of the catalysts for the stock as discussed in the next section.
What Catalysts Should You Watch For With Exxon Mobil’s Stock?
In my view, there are two major catalysts relating to Exxon Mobil that investors should watch for in 2023.
One catalyst is higher-than-expected share buybacks.
On September 1, 2022, XOM announced that the company will divest “its (48.2%) share of the Aera Energy joint venture” which represents its “interests in the Aera oil-production operation in California.” The disposal is intended to be concluded in Q4 2022.
Exxon Mobil could potentially generate around $1.9 billion in divestment proceeds from the sale of its interest in the Aera JV. This is based on Shell’s (SHEL) September 1, 2022 press release which indicates that the company is selling its 51.8% stake in the Aera JV for “approximately $2 billion in cash” as part of the same transaction.
XOM had previously set a target of completing asset divestments with an aggregate transaction value of $25 billion by 2025. This recent Aera JV stake disposal puts Exxon Mobil in a good position to meet or exceed its asset monetization goal. In other words, a faster-than-expected pace of asset sales might push Exxon Mobil to raise its current 2022-2023 share buyback guidance of $30 billion. This will also help to narrow the gap in buyback yield between XOM and Chevron.
Another catalyst is better-than-expected profitability.
There are worries that the chemical segment could be a drag on Exxon Mobil’s overall profit margins and earnings in the near term. I had noted earlier in my previous August 9, 2022 article for Exxon Mobil that “XOM’s Q2 2022 chemical margins were at the lower end of its historical range.”
I believe that these concerns are overblown and Exxon Mobil should be able to achieve higher-than-expected profit margins going forward, which could surprise the market in a positive way. Specifically, XOM is likely going to offset the lower chemical segment margins with cost optimization efforts.
In its Q2 2022 earnings presentation slides, Exxon Mobil revealed that the company had achieved “estimated cumulative annual structural savings” of approximately $6 billion as compared to pre-pandemic levels in 2019. XOM is targeting to realize an even higher $9 billion of expense reduction on an annualized basis by 2023, as indicated at its most recent quarterly earnings briefing.
Is Exxon Mobil A Good Long-Term Investment?
I take the view that Exxon Mobil is a superior long-term investment choice as compared to other oil majors and energy companies.
The key is that XOM isn’t betting the farm on either fossil fuels or renewable energy. Instead, Exxon Mobil has chosen a strategy which gives it the flexibility to pivot depending on how the market evolves.
This is evidenced by Exxon Mobil’s management comments at the company’s Investor Day. XOM had stressed at its Investor Day held earlier on March 2, 2022 that its strategy is to “allocate additional resources to our Low Carbon Solutions business” if the shift toward renewable energy accelerates, and “retain resources in our oil and gas businesses” if the shift is slower than expected. More importantly, Exxon Mobil emphasized that its goal is to “grow value across a broad range of future scenarios” by having “optionality.”
Predicting the future is a fool’s errand, and I have a more favorable view of XOM’s approach in dealing with energy transition that puts it in a good position to perform well in the long run.
Is XOM Stock A Buy, Sell, Or Hold?
XOM still deserves a Buy rating in my opinion. Positive surprises in the form of stronger-than-expected profitability for the company and an increase in its share buyback guidance will help Exxon Mobil’s shares to perform well in 2023.
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