Yahoo Finance 3 Reasons Exxon Mobil Corporation (XOM) Stock Bears Are Wrong
Shares of the U.S.’ largest oil company Exxon Mobil Corporation (NYSE:XOM) have been hard hit so far this year — losing 15% over the past 8 months. This month, a second-quarter earnings miss and worries about the effects of hurricane Harvey have driven the shares to trade near 52-week lows. However, don’t be fooled by the negative sentiment that’s brought XOM stock lower over the past year.
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When you break it down, there’s a lot to like about Exxon Mobil stock and now might be a great time to snap up a solid energy stock at a bargain basement price.
XOM Stock: Second-Quarter Earnings Slump?
Exxon Mobil stock lost ground quickly after its second-quarter earnings miss, but although the firm did turn in a bottom-line miss, there were some promising aspects of the call as well.
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During the second quarter, XOM drilled a fourth test well at its Liza exploration site and a second test well at its Payara site, both of which are in South America. Both exploration wells yielded more petroleum than the firm had been expecting, leading company execs to forecast that the entire area, a 6.6 million acre plot dubbed Stabroek, contains between 2.3 billion and 2.8 billion barrels of oil equivalent. Those figures are based on actual oil that has been found and the firm is due to drill additional exploratory wells in the coming quarters, so we could see those estimates rise even higher in the quarters to come.
The most exciting part about this massive influx of oil is that XOM is planning to develop the field and produce usable oil by 2020. Even more promising is the fact that Exxon Mobil sees the fields turning in double-digit profits assuming oil is just $40 per barrel.
So, while XOM stock is struggling to wow investors in the current conditions, the firm is investing heavily in its future. Should oil prices rise, or even remain the same, the company is likely to have a influx of cash from this project in the next few years.
Bears Say: Harvey Will Hurt Exxon Mobil Stock
Hurricane Harvey has been another concern for investors in the energy sector because the storm has forced firms like Exxon Mobil to close down their Texas operations. XOM had to reduce production at its Beaumont refinery and completely shut down its Baytown plant because of the storm. Not only does that lower XOM’s production by more than 560,000 barrels per day, but there’s no telling how long the plants will be operating at reduced capacity due to damage from the storm.
It may sound bad, but when you consider the size and diversification of Exxon Mobil’s business, the effects of the storm are unlikely to do any major damage.
First of all, less than 10% of XOM’s earnings so far this year have come from U.S. downstream activities. That means that production from the two Texas plants are a drop in the bucket for XOM. Not only are the two a small part of Exxon’s overall operations, but they will likely resume as normal in a few weeks, tops. That means that any negative effects on XOM stock are likely to be short-lived.
Bears Say: It Is Not as Strong as It Once Was
XOM stock is top of the class when it comes to the oil and gas sector. It’s true that the firm isn’t quite as financially sound as it used to be, but that’s to be expected when oil prices are floundering. Exxon is still a great pick in the sector and its financials are still impressive enough for Moody’s to name it as one of the few U.S. firms with an AAA credit rating.
One of the big reasons that investors add XOM stock to their portfolios is the firm’s dividend payments. Exxon Mobil stock currently pays out a 4% yield and the firm has upped its dividend payments every year for the past 34.
There are some who say that XOM can continue to support dividend increases, but I beg to differ. The company has been forced to spend more than it makes on dividend payments recently, but the firm has been able to keep up because of its impressive cash flow.
XOM’s payout ratio is 108.6%, a figure that leaves very little wiggle room. But compare that to peers like BP plc (ADR) (NYSE:BP) and Chevron Corporation (NYSE:CVX), whose payout ratios are 140% and 138.8% respectively, and it doesn’t look so bad.
Exxon Mobil is unlikely to stop raising dividend payments unless its situation gets dire, and judging by the firm’s future bets in South America, that time of reckoning isn’t anywhere on the horizon.
The Bottom Line on XOM
If you’re looking to add oil stocks to your portfolio, you’d be daft to overlook XOM stock. The company’s size and diversity make it relatively safe and the firm’s dividend payments should help investors ride out the bumps on the way.
I think the future of Exxon Mobil stock looks promising, especially considering the company’s South American exploration fields. Investors who buy-in now are getting a real bargain.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
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