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Exxon Mobil: Buy, Sell, or Hold?

Oil and gas giant Exxon Mobil (XOM) has been surging over the past two months on rising crude oil prices. However, the inexorable transition to clean energy is expected to be a major headwind for XOM. The demand for oil is projected to decline in the long run. Will XOM be able to retain its operational volume and with that its growth trajectory over the long term? Or should one hold off on one’s investment in the company? Read more to find out.

Texas-based oil and gas explorer Exxon Mobil Corporation (XOM) has gained 67% over the past six months because crude oil prices have had an impressive rebound from the initial days of the pandemic. With industrial and manufacturing sectors leading the global economic recovery, demand for oil has been recovering rapidly. Anticipation of the $1.9 trillion COVID-19 stimulus bill that was signed by President Biden today has been one of the major factors driving oil demand in the country of late..

However, the rally in crude oil is expected to be short lived because major economies are transitioning to clean energy and the OPEC and OPEC+ may not maintain their supply cut mode for long. While the Biden administration is currently focused on macroeconomic revival, the President has also been taking steps to establish the United States as a clean energy economy by rejoining the Paris Accord and blocking the Keystone XL Pipeline permit. In fact, after the passage of the COVID-19 stimulus bill, the White House plans to put together and pass an infrastructure bill. Furthermore, the European Union, Japan and South Korea aim to achieve carbon neutrality by 2050, while China aims to hit that level by 2060.

The rising awareness regarding climate change on an individual level is also expected to play a key role in this transition, as people switch to carbon-friendly alternatives, such as electric vehicles, and solar power.

Thus, we think XOM’s bull run is subject to a trend reversal in the long term, making it a potentially volatile stock.

Here’s what could shape XOM’s performance in the near term:

Changing Investment Patterns

Since the rollout launch of COVID-19 vaccines last  November, investors have been betting on a  V-shaped macroeconomic revival by investing in turnaround non-tech and outdoor stocks. Such investments are likely to generate significant returns in the short run as outdoor activities and oil markets witness an  uptick. However, with the world is gradually transitioning to remote lifestyles and clean energy gaining traction  in the world economy.

So, investors’ focus on short-term trends have helped XOM to gain nearly 50% year-to-date.

Oil Price Gains

Several production cuts have been implemented by major oil producing countries to boost oil prices over the past year. The OPEC and OPEC+ alliance aims to stick to its production cuts until l at least April 2021 despite the rising oil prices as the demand recovers from the COVID-19 slump. In addition, Saudi Arabia announced voluntary reductions in supply in early March as OEPC+ countries such as Russia and Kazakhstan increased their oil supply to counter the booming United States shale industry.

Freezing temperatures in Texas over the past month and drone attacks on Saudi Arabia’s oil facilities have led to a further uptick in oil prices as production took a severe hit. Against this backdrop, Barclays has increased its WTI crude oil price estimate by $6 to $58/ barrel, and Brent crude oil prices by $7 to $62/ barrel for 2021.

Trading at a Premium Valuation

In terms of forward non-GAAP p/e, XOM is currently trading at 25.27x, almost double the industry average 12.63x. The company’s forward non-GAAP PEG ratio of 3.86 is 63.4% higher than the industry average 2.36.

XOM’s forward ev/ebitda and price/cash flow multiples of 9.23 and 9.28, respectively, are significantly higher than the respective industry averages.

Consensus Ratings and Price Target Indicate Potential Downside

Of 28 Wall Street analysts that rated XOM, 15 rated it Hold, two rated it Sell, and two rated it Strong Sell. Furthermore, analysts expect the stock to decline 3.8% in the near term to hit $53.93.

POWR Ratings Reflect Uncertainty

XOM has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

XOM has a grade of C for Growth, Stability, Sentiment and Quality. The stock has a beta of 1.40, which is in sync with its Stability grade. In addition,  the company’s weak financials justify its Growth and Quality grades. XOM’s revenues and total assets have declined at CAGRs of 8.8% and 5.8%, respectively, over the past three years, while its EBITDA and EPS fell 128.9% and 256.5%, respectively, year-over-year. The company’s trailing 12-month’s net income, levered free cash flow, and ROE margins are negative.

Of  95 stocks in the D-rated Energy – Oil & Gas industry, XOM is ranked #68. You can check out additional XOM’s ratings for Value and Momentum here.

Click here to view the top-rated stocks in the Energy – Oil & Gas industry.

Bottom Line

The recent rally in the oil and natural gas stocks was accelerated by the winter freeze in Texas over the last month, as U.S. shale production faltered due to sub-zero temperatures. Moreover, XOM’s recent expansion into Guyana for fracking over the past couple of months has buoyed  oil and gas investors because the company can capitalize on the higher prices to amplify its revenues. However, we think the slow but ongoing  clean energy transition makes XOM a dubious long-term investment.

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XOM shares were trading at $61.32 per share on Thursday afternoon, down $0.45 (-0.73%). Year-to-date, XOM has gained 51.29%, versus a 5.30% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.


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