This oil stock still looks like a good long-term opportunity

  • XOM posted the best mega cap performance in the last 12 months.
  • ‘s price increase helped, but there were also internal improvements.
  • Future earnings are unlikely to match those of recent years, but it looks like the ‘old’ Exxon Mobil is back.

Year-to-date, Exxon Mobil (NYSE:) posted a massive 55.8% gain. In the last 12 months, XOM has grown 72%. These two metrics are among the highest of the 33 megacap stocks (with market capitalization above his $200 billion) in the US market.

ExxonMobil W1


Of course, energy prices helped. Since the beginning of the year, the price of he has risen 41%. Henry Hub’s spot price for natural gas has more than doubled his. But these strengths alone aren’t enough to explain all of ExxonMobil’s stock gains.

After all, other diversified oil majors have similar tailwinds. But Chevron (NYSE:) he’s up 36% so far in 2022 and BP (LON:) (NYSE:) he’s up only 19%.

XOM’s superior performance relative to its peers is due in part to decisions made by Exxon Mobil itself, as well as the wider market. And there are good reasons to believe that the company and its stock will reap the rewards of these decisions for some time.

Objections to XOM actions

The objection to XOM actions is relatively simple. Clearly, there are genuine concerns about the demands of the global economy. And generally speaking, when demand drops, so does oil prices.

To some extent, macroeconomic risks are priced into action. XOM is trading at just 10.4x 12 months trailing earnings. In other words, the market expects current earnings to exceed long-term averages.

It makes sense, but it’s not just for macro concerns. According to Exxon’s second-quarter conference call, Exxon’s refining business is having a strong year with margins so far at “very high levels.” In fact, in the 2000s, these margins added more than $1 per share to after-tax earnings.

In other words, XOM is an inherently cyclical business. Certainly the downstream segments (refining, distribution, fuel supply) and chemicals provide some inside information. In particular, profits from chemicals generally increase when the price of oil (the main input) falls.

Nevertheless, even on a large scale, it is a cyclical activity. It’s also risky to buy cyclical companies just because they’re “cheap” before the cycle reverses. Global economic conditions certainly point to real downside risks.

take a long-term view

Investors who own XOM and other energy companies now bear the risk of falling oil prices. it is clear. However, the correlation between macroeconomic activity and oil prices may not be as strong as it once was.

After all, the price of oil is determined not only by demand, but also by supply. And even before Russia’s invasion of Ukraine, the offer caused real problems.Western governments continue to put pressure on oil producers.

The industry itself is also going backwards. In particular, US shale producers have suffered from the market crash of the past decade. They generally focused more on returning cash to shareholders than expanding production.

But Exxon is taking a different approach, as management recently explained, including on the second quarter conference call. Our investment in production has allowed us to take advantage of the recent surge in oil prices to increase production. The company ramped up its refinery capacity while other facilities were shut down due to the coronavirus pandemic.

This is not a case of ExxonMobil simply profiting from rising energy prices. It’s a strategy that seems more relevant since last year’s stunning win for Engine No 1 activists.

These business improvements won’t necessarily go away. Also, the situation in the external market that we are currently seeing is not the same.

Producers in the United States and elsewhere have yet to ramp up production in earnest. Exxon’s refining business appears to be well positioned. The chemicals business has dropped significantly this year, but profits are more than double what he was in 2019.

While the recent surge in oil prices may seem like a shock, Brent is actually roughly in the middle of its 10-year range. Aside from the early days of the pandemic, when crude oil futures were notoriously negative, the bottom of that range has been the last decade, when producers dramatically increased production. Unlikely.

At this valuation, ExxonMobil stock should at least hold up unless oil prices fall again. This company is simply better off than it was before, regardless of the price of oil.

Disclaimer: At the time of writing this article, Vince Martin has no positions in any of the stocks mentioned.

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