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Exxon Mobil: Historically Cheap, but Mediocre Upside Potential
Stock Analysis & Ideas

Exxon Mobil: Historically Cheap, but Mediocre Upside Potential

Formed in 1999 through the merger of Exxon and Mobil, Exxon Mobil Corporation (XOM) is an American multinational oil and gas company.

I am neutral on Exxon Mobil because its strong position in its industry and global economy and attractive valuation multiples are offset by industry headwinds and Wall Street’s neutral stance on the stock. (See Analysts’ Top Stocks on TipRanks)

Strengths

Not only is ExxonMobil one of the world’s largest companies in terms of revenue, but it is also one of the largest among the world’s Big Oil companies. The company boasts a total of 37 oil refineries in 21 different countries and a total daily refining capacity of 6.3 million barrels.

ExxonMobil is the largest privately-owned company in the energy industry and produces about 2% of the world’s total energy. It is organized into three business segments: Upstream, Downstream, and Chemical.

Recent Results

ExxonMobil reported earnings of $6.8 million in the third quarter of 2021, showing an improvement from the previous year, where there was a reported loss of $680 million. Total earnings per common share were $1.57, also showing improvement from the previous year.

Cash flows from operating activities were at $12.1 billion, which were used for capital investments, debt reduction, and dividend payments.

Regarding Upstream, average realizations for crude oil increased 7% from the second quarter, and natural gas increased 28% from the previous quarter. Total earnings for 2021 were $3.9 billion due to higher prices and volumes and reduced expenses. Of these earnings, $3.1 billion were from outside the U.S., while the rest were domestic.

For Downstream, fuel margins showed improvement from the previous quarter, and overall refining throughput improved 5% from the second quarter. Total earnings for Downstream were reported at $1.25 billion, mainly due to improved margins. About $663 million of the total earnings for Downstream were from the U.S., whereas $592 were from other countries.

The chemical segment showed quarterly earnings of $2.1 billion, with strong industry margins and high demand. $1.1 billion of total earnings were from the U.S., whereas the remaining were from other countries.

Valuation Metrics

Exxon Mobil’s stock looks attractively priced at the moment as its enterprise value-to-EBIT ratio is currently 9.1x compared to its historical average of 15x. Furthermore, its price-to-forward normalized earnings ratio is 10.1x compared to its historical average of 13.7x.

Wall Street’s Take

Turning to Wall Street, Exxon Mobil has a Hold consensus rating based on five Buys, four Holds, and three Sell ratings in the past three months. The average Exxon Mobil price target of $69.73 implies 9.7% upside potential.

Summary and Conclusion

Exxon Mobil is a clear leader in an industry that has traditionally been – and remains – vital to the global economy. Given the significant volatility and disruption facing the industry in recent years, Exxon Mobil’s status as a safe and reliable blue-chip dividend growth stock has been somewhat tarnished.

Nevertheless, the company has recovered nicely with energy prices over the past year. It is investing aggressively to remain a viable company for decades to come through the ongoing global economic transition away from fossil fuels and towards renewable energy.

The stock looks undervalued based on historical averages, though the growth outlook for the company is also weaker than it has been in a long time.

Wall Street analysts are neutral on the stock and the consensus price target indicates that the upside potential in the stock is mediocre for the foreseeable future. As a result, investors might want to wait for a pullback in the share price before adding shares.

Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.

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