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Exxon Mobil: Improving Outlook, but Risks Remain
Stock Analysis & Ideas

Exxon Mobil: Improving Outlook, but Risks Remain

Big Oil juggernaut Exxon Mobil (XOM) needs no introduction.

The $265-billion company is one of the largest crude oil and natural gas producers in the world. However, Exxon Mobile is better known among the income-oriented for its Dividend Aristocrat status.

The company is a constituent in the relevant index, which targets S&P 500 companies that have increased dividend payments each year for at least 25 years.

While the company showcases a strong track record of capital returns, Exxon has recently faced pressure on multiple fronts. Not only is the war on fossil fuels limiting the company’s prospects, but the COVID-19 pandemic shook the energy sector, and demand for Exxon’s petrochemical products.

Exxon Moble could continue to be a strong dividend pick ahead, especially will oil prices increasing. That said, Exxon’s dividend shouldn’t be blindly trusted.

If Exxon’s financials find themselves under pressure again in the short-to-medium term, a dividend cut should not come as a surprise. I am neutral on the stock. (See Analysts’ Top Stocks on TipRanks)

Recent, Upcoming Results

In late July, Exxon reported its Q2 2021 financial results, with performance coming in relatively sound.

Production in the Permian grew 34% year-over-year, though total production declined 2% due to higher maintenance activity.

Exxon’s Chemical segment surprised investors, posting record earnings of $2.3 billion, powered by improved margins and petrochemical prices.

Exxon’s Upstream division also delivered strong results due to higher oil price levels, which were in turn driven by global production cuts. The company returned to profitability, posting a quarterly adjusted EPS of $1.10 versus ($0.70) in the comparable period last year.

Exxon is expected to release its Q3 results by the end of October, with analysts’ confidence increased as of recently, due to a favorable oil and petrochemical price environment.

The International Energy Agency also points towards a favorable oil outlook moving forward.

Specifically, analysts expect the company to post adjusted EPS of $4.67 for the year, which implies that the current tailwinds shall persist for a while.

Is the Dividend Safe?

Exxon is a Dividend Aristocrat, with its dividend constituting likely the best attraction in terms of holding the stock.

However, the company has already paid 10 consecutive $0.87 quarterly dividends. The company’s upcoming dividend announcement makes for Exxon’s last chance to hike the dividend in order to maintain its 38-year streak (and move it up to 39 consecutive annual increases).

Still, it’s worth noting that even maintaining the dividend during the pandemic was rather impressive. At its current annual payout rate of $3.48, the payout ratio stands at 217.5%.

Valuation

The stock’s P/E based on its FY 2021 expected EPS stands at 13.4.

This seems to be a fair multiple for a company with a big moat, relatively strong profitability expectations going forward, and a solid dividend yield of 5.5%.

That said, Exxon seems like the least prepared Oil Major to eventually transition to renewables, having made the least developments compared to its peers. Hence, long-term risks regarding the company’s sustainability remain.

Wall Street’s Take

Turning to Wall Street, Exxon Mobile has a Hold consensus rating, based on three Buys, five Holds, and two Sells assigned in the past three months. At $67.85, the average Exxon Mobile price target implies 8.2% upside potential.

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

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