The extension of voluntary supply cuts by OPEC+ members Russia and Saudi Arabia has propelled oil prices to 10-month highs, and seemingly just as inflation was starting to gradually normalize from stubbornly high levels. Notably, since that production announcement on Sept. 5, West Texas crude for October delivery (CLV23) is up 2.4%.
While OPEC+ is now forecasting the tightest oil market supply in 10 years, predictions from the Energy Information Administration (EIA) call for oil demand to outstrip supply through 2024 - suggesting oil prices will find support near elevated levels for the foreseeable future.
One way for investors to capitalize on higher crude prices is by picking up shares of an established oil company with a proven operational track record and a healthy dividend yield - and this is where Exxon Mobil (XOM) comes in.
With a storied history that dates back to 1882, Exxon is the world's leading oil and gas producer by market capitalization at $470.33 billion, and has operations in more than 40 countries. The company is primarily engaged in the exploration and production of crude oil and natural gas along with refining, marketing and distribution of petroleum products.
Here, we outline 3 reasons why Exxon has emerged as a top energy stock to buy right now.
1. Earnings Are Stronger Than They Look, and Comparisons Should Get Easier
On the face of it, Exxon's numbers for Q2 2023 were disappointing. Not only did revenue and earnings fall from the year-ago period, but they missed consensus estimates, too. Revenues of $80.8 billion were down 27.4% year-over-year, while EPS was down even more sharply, off 54% to $1.94.
However, scratch the surface and the picture becomes a bit clearer. XOM was facing particularly stiff year-ago comparisons for its most recent quarter, given that crude oil prices were elevated above $100 per barrel throughout much of 1H 2022.
In fact, relative to Q2 2018 - when commodity price inputs were more comparable to current levels - XOM nearly doubled its earnings in the recently concluded quarter, due to what CEO Darren Woods called "our work in the intervening years to reshape our portfolio of businesses, invest in advanced projects and drive a higher level of efficiency and effectiveness in everything we do."
CFO Kathryn Mikells further clarified that - outside of the record-setting performance in 2022 - Q2 2023 was Exxon's best second-quarter showing since at least 2011, driven by cost-cutting efforts and the sale of underperforming assets.
Moreover, the company's production levels remained solid as it achieved the highest second-quarter global refinery throughput in the last 15 years with 4.173 million barrels refined per day. This denotes a 4.6% increase from the prior year. Further, net production of crude oil, natural gas and other petroleum products came in at 2.353 million barrels per day, up 2.4% from the year-ago period on record quarterly production in the Permian Basin and Guyana, which achieved a 20% year-over-year growth.
Although free cash flow and cash flow from operating activities dropped year-over-year, Exxon said it's on track to achieve structural cost savings of $9 billion by the end of 2023.
Meanwhile, to expand its clean energy portfolio, Exxon snapped up Denbury (DEN) in an all-stock transaction worth $4.9 billion. Denbury is a developer of carbon capture, utilization and storage solutions. Exxon's acquisition of Denbury will give the company access to the largest U.S.-owned and operated CO2 pipeline network at 1,300 miles, as well as Denbury's Gulf Coast and Rocky Mountain oil and natural gas operations, which have over 200 million barrels of oil equivalent and produce 47,000 oil-equivalent barrels per day.
Further, Exxon is venturing into the lithium extraction space, which provides another avenue for the company to unlock shareholder value through its clean energy initiatives. Although it is not expected to be EPS accretive immediately, Exxon's deep expertise in the traditional energy space makes it well-positioned to emerge as a strong player in this space. Notably, the company is aiming to extract 100,000 tons of lithium per year.
2. Outperforming XOM Still Offers Solid Value
Exxon has outperformed both the Energy Select Sector SPDR Fund (XLE) and its biggest competitor, Chevron (CVX), over the past year. While XOM is up 26% over the past 52 weeks, the broader XLE is up a little less than 20% - and rival CVX has gained only 7.9%.
Despite its price outperformance, XOM is still attractively valued compared to primary competitor CVX. Exxon is currently trading a forward price/earnings (p/e) ratio of 12.94, which is higher than Chevron's forward p/e of 12.68. However, Exxon is more attractively valued on the basis of price/sales, where its multiple of 1.10 compares favorably to Chevron's 1.24, and also in terms of price/cash flow (5.73 vs. Chevron's 6.06).
Further, Exxon has maintained 24 years of dividend growth, with a current yield of 3.1% - roughly in line with energy sector averages.
3. Analysts Expect More Upside Ahead
Taking all this into account, analysts remain confident about the future of Exxon. The consensus has handed out a “Moderate Buy” rating on the stock with a mean target price of $123.88. This indicates an upside potential of about 6.3% from current levels.
Out of 18 analysts covering the stock, 8 have a “Strong Buy” rating and 10 have a “Hold” rating - which represents a slightly more bullish configuration than one month ago.
Final Takeaway
Exxon is expected to be a prime beneficiary of rising oil prices in the near term, as tight supply conditions run headfirst into persistently strong demand. This is because of its decades of operational expertise, coupled with its dominant position in the global oil and gas space.
Investors should consider XOM a top energy stock not only for its rising production levels, large reserves of cash, earnings discipline, healthy dividend yield, and optimistic analyst endorsements, but also its moves to establish itself as a leading player in the clean energy space - which should give it the scope and infrastructure to keep generating substantial shareholder value in the upcoming years.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
