Exxon Mobil Stock Has An Ace Up Its Sleeve (NYSE:XOM)

Exxon Retail Gas station. ExxonMobil is the World"s Largest Oil and Gas Company.

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What happened?

Exxon Mobil Corporation (NYSE:XOM) recently reported its second quarter earnings results and frankly, knocked the ball out of the park. Even so, Exxon Mobil’s shares are still trading below their 52-week high in set in June.

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Exxon Mobil Current Chart (Finviz)

The stock has dropped 15% in sympathy with crude oil, which is down nearly 10% for the month at the time of this writing.

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Crude Oil Futures (Seeking Alpha)

Nonetheless, the technical setup looks extremely positive. The 200-day simple moving average (“sma”) is sloping upward, the stock has recently broken above the 50-day sma, and a very strong trend reversal signal, the cup and handle formation, has been fulfilled. I expect the next move to be substantially to the upside with the potential to break above the previous 52 week high. My current price target is $110, implying 16% upside. In the following piece I lay out my bull case for your perusal.

Exxon Mobil Q2 2022 earnings results

Exxon Mobil beat on EPS by $0.29 cents, coming in at $4.14 and beat on revenues by $3.62 billion. Exxon Mobil Corporation announced estimated second-quarter 2022 earnings of $17.9 billion, or $4.21 per share assuming dilution. Second-quarter results included a favorable identified item of nearly $300 million associated with the sale of the Barnett Shale Upstream assets. Capital and exploration expenditures were $4.6 billion in the second quarter and $9.5 billion for the first half of 2022.

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Exxon Mobil Q2 Earnings (Seeking Alpha)

Chairman and Chief Executive Officer Darren Woods stated:

“Earnings and cash flow benefited from increased production, higher realizations, and tight cost control. Strong second-quarter results reflect our focus on the fundamentals and the investments we put in motion several years ago and sustained through the depths of the pandemic.”

Cash management review

Strong earnings drove increased cash flows from operations. Exxon Mobil returned $7.6 billion to shareholders, of which about half was in the form of dividends and the remainder in share repurchases, consistent with the oil giant’s previous program. Exxon Mobil stated during its Corporate Plan Update in December that the company expects to repurchase $10 billion shares. Just recently, Exxon actually announced a huge increase to the share buyback program, upping it to $30 billion shares in total through 2023. This move confirms the confidence Exxon Mobil has in the strength of its balance sheet and future prospects for profits.

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Cash Position (XOM)

Second quarter capex of $4.6 billion was in line with the full-year range of $21 billion. The fact of the matter is this quarter’s results are important, but it will be the guidance given going forward that will augur the stock price one way or the other. Let’s delve into what lies ahead at this time, shall we?

What Lies ahead for Exxon Mobil?

Guidance

For the full year, in the Permian, we expect to achieve 25% production growth for the second consecutive year. In Guyana, our total capacity is now more than 340,000 oil-equivalent barrels per day.

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Exxon Mobil Q3 Guidance (XOM)

The sizable investments Exxon’s been making over the past several years puts the company in a great position to deliver increased production at a time when the world needs it most. The Texas oil titan is continuing to increase production of low-cost barrels in Guyana and the Permian all the while maximizing output of currently existing facilities as well. Exxon’s new Corpus Christi complex was cash and earnings positive in the first half of the year.

According to the company, the U.S. Gulf Coast refining capacity is poised to increase by about 250,000 barrels per day with the start-up of the Beaumont refinery expansion project in the first quarter of 2023. Two new LNG projects are also advancing. Coral LNG and Mozambique is set to deliver its first cargo in the second half of this year. The Golden Pass LNG project, which will provide 18 million tons per year of new LNG supplies, remains on schedule to start up in 2024. Once completed, Golden Pass will increase LNG from the Gulf Coast by 20%.

In addition, Exxon continues to divest nonstrategic assets at an opportune point in the cycle and have delivered strong safety and reliability while controlling costs. These moves are improving the asset mix by lowering break-evens and boosting resiliency. The Low Carbon Solutions business continues to grow its portfolio of opportunities with four newly announced carbon capture and storage opportunities in Australia, China, Indonesia and the Netherlands. As you can see the company is well positioned for the coming years. Now let’s take a closer look at the current market backdrop to see what they will be facing.

Current market environment backdrop

A tight supply/demand environment has developed primarily due to low investment levels during the pandemic. The low supply, coupled with a substantial increase in demand as the pandemic faded, contributed greatly to the rapid increases in prices for crude, natural gas, and refined products.

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Tight Supply/Demand Market (XOM)

What’s more, the events in Ukraine added uncertainty to what was already a tight supply outlook. Brent crude rose by about $22 per barrel, or 27% versus the fourth quarter of 2021. Today, natural gas prices remain well above the 10-year historical ranges, driven by tight global market conditions and ongoing European supply concerns. Moreover, tight supplies to manufacturers have pushed refining margins to the top of the range.

Large annual investments in oil and gas production are required to offset normal depletion, even more is required to grow net production. Prior to the pandemic, industry investments were below historical levels.

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Lack of Investment (XOM)

The economy-wide shutdowns during the pandemic exacerbated the problem. The industry is currently experiencing tight markets across most types of distillates as supply lags demand recovery.

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Leading Increased Production (XOM)

Given the long investment cycle times, growing supply will not happen overnight. Exxon Mobil has actually been leading the way when it comes to increased production due to the fact they have continued to invest throughout the cycle. CEO Woods stated:

At Exxon Mobil, throughout this period, we stayed focused on the fundamentals and led our IOC peers in oil and gas investment. We leaned in when others leaned out, including investments in U.S. refining capacity, notably with our Beaumont refinery expansion.”

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Increased Production (XOM)

Refining business is Exxon’s ace up its sleeve

What’s more, there is a clear tightness in refining. The closure rate during the pandemic was three times the rate of the 2008 financial crisis. There once were 15 refineries across the U.S., now about half that number.

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Reduced Refining (XOM)

Piper Sandler recently upgraded XOM shares to Overweight from Neutral with a $109 price target, seeing the setup for U.S. energy stocks as “increasingly attractive.” It remains bullish generally on refiners and integrated oil companies. Piper analyst Ryan Todd said he is “constructive” on Exxon Mobil, driven by robust downstream performance and greater-than-expected resilience in the chemicals business. Todd stated:

The upgrade reflects the significant transformation underway at the company, increasingly advantageous asset portfolio, attractive portfolio mix (overweight refining and strong exposure to international gas with bullish 18-month outlooks for both) and attractive relative valuation.”

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Exxon Mobil Refining (XOM)

XOM has the largest refining footprint of all the Big Oil companies at a time of rising margins and increasing demand for gasoline and diesel. Thus, the benefits of a continuing tight supply/demand environment bode extremely well for Exxon Mobil’s refining business. But wait, there is more! The company is implementing a series of organizational changes to streamline processes leveraging scale to improve the effectiveness of their operations.

Series of streamlining organizational changes

CEO Darren Woods detailed a series of organizational changes to further leverage the scale and integration of the corporation to improve the effectiveness of operations to better serve its customers.

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Evolving Structure (XOM)

CEO Woods stated:

We combined our Downstream and Chemical operations into a single Product Solutions Business. This new integrated business will be focused on developing high-value products, improving portfolio value and leading in sustainability. As a result of these changes, our company is now organized along 3 primary businesses: Upstream, Product Solutions and Low Carbon Solutions.”

These 3 businesses are supported by corporate-wide organizations, including projects technology, engineering, operations, safety and sustainability.

Exxon Mobil is a corner stone holding in my sleep well at night (“SWAN”) retirement income portfolio. Therefore, it would be remiss of me to not review the state of affairs as it relates to the dividend safety and growth prospects. Needless to say, the state of affairs is strong.

Dividend review

Exxon Mobil is a dividend aristocrat with 40 years of consecutive dividend payments.

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Exxon Mobil Dividend History (Seeking Alpha)

As a former Texas oil man myself, I have a certain affinity for the Texas oil titan. I can say without doubt the company is dedicated to paying the dividend come hell or high water.

Dividend summary

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Exxon Mobil Dividend Summary (Seeking Alpha)

In fact, it has been overtly expressed by management that the company’s top priority at this time is return of capital to shareholders as well as long-term capital investments in production to keep the cash flowing in for years to come. The follow slide details analyst dividend growth estimates for the coming two years.

Consensus Dividend Estimates

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Consensus Dividend Growth estimates (Seeking Alpha)

Now let’s take a look at the current fundamentals.

Fundamental review

First of all, Exxon is basically trading for a song at the present valuation. Exxon’s forward P/E of 8.63 is approximately half of the current S&P 500 forward P/E of 18. The stock is incredibly trading for a PEG ratio of 0.41; anything less than 1 is considered to be vastly undervalued. Finally, the Texas oil titan is a free cash flow machine, ($20 billion in cash flow from operations last quarter). It is currently trading for approximately 11 times free cash flow, where anything less than 15 times is considered cheap. Moreover, Seeking Alpha’s Quant analysis rates Exxon Mobil as a Strong Buy with A scores for growth and profitability.

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Quant Rating (Seeking Alpha)

Now, let’s wrap this piece up with the key investor takeaways.

Key investor takeaways

The following slide details the key takeaways going forward. The bottom line is the oil giant is well-heeled and positioned to succeed in the current environment. The downstream refining operations are second to none, which I see as their ace in the hole or up their sleeve. However you want to put it, Exxon Mobil holds all the cards at present.

Key Takeaways

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Key Takeaways (XOM)

Exxon’s management is evolving the organization from a holding company to an operating company in an attempt to better serve its customers’ evolving needs as well as to continue to grow long-term shareholder value.

I see the stock eclipsing its all-time high as the supply/demand imbalance begins to tighten even more so over the coming months. I feel confident oil will increase or at least maintain this level for the foreseeable future based on the under-investment in production, China coming back on line, the already tight supply/demand imbalance, a short and shallow recession, and the SPR release ending. One thing many have not considered regarding the SPR release is we will need to fill it back up at some point. This will provide even more added pressure on supply.

I see now as an excellent opportunity to get in at the recent lows. With 16% upside to $110 and a 4% dividend yield, I am anticipating a solid 20% total return opportunity over the next 12 months.

Those are my thoughts on the matter, I look forward to reading yours! And remember, always layer into any position and use articles such as this as a starting point for your own due diligence.

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