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Is ExxonMobil's Premium Stock Valuation a Buy, Sell or Hold?
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Exxon Mobil Corporation (XOM - Free Report) is currently considered expensive on a relative basis, with the stock trading at a 6.01x trailing 12-month Enterprise Value to Earnings Before Interest, Taxes, Depreciation and Amortization (EV/EBITDA), which is at a premium compared with the broader industry average of 3.85x.
A premium valuation generally indicates that the market has strong confidence in the company’s prospects. However, this necessitates scrutiny to determine if this higher price is warranted.
Image Source: Zacks Investment Research
Therefore, a more thorough analysis is needed to determine whether ExxonMobil's premium valuation is justified based on its fundamentals, growth prospects and prevailing market conditions.
Permian & Guyana: Key Drivers of ExxonMobil’s Future
With a strong focus on strengthening its presence in the Permian, ExxonMobil completed the acquisition of Pioneer Natural Resources Company on May 3. With 1.4 million net acres of the combined company in the Delaware and Midland basins, having an estimated 16 billion barrels of oil equivalent resource, ExxonMobil has greatly transformed its upstream portfolio.
The company expects that based on 2023 volumes, its production from the most prolific basin will more than double to 1.3 million barrels of oil equivalent per day (MMBoE/D). For 2027, the energy giant expects its Permian production volume to increase to 2 MMBoE/D.
Similar to its operations in the Permian, ExxonMobil boasts a robust project pipeline in offshore Guyana resources. The company is well-positioned to generate significant returns from both the Permian and Guyana due to low production costs in these assets. With oil prices remaining favorable this year, ExxonMobil is poised to generate substantial cash flows from its upstream operations, which contribute the majority to its total earnings.
ExxonMobil’s Integrated Business Model & Solid Balance Sheet
Due to its integrated business model, ExxonMobil is well protected when oil price turns low. This is because, apart from exploration and production activities, the company has an extensive footprint in refining and chemical businesses.
During uncertain times, ExxonMobil can rely on its robust balance sheet. Compared to the industry’s composite stocks, which have a debt-to-capitalization ratio of 22.56%, ExxonMobil maintains a much lower ratio at 13.52%. Favorable commodity prices have enabled it to enhance its financial position and repay the debt incurred during the pandemic.
Image Source: Zacks Investment Research
Chevron Corporation (CVX - Free Report) is another integrated energy giant with a strong balance sheet. Belonging to the same industry, Chevron has a much lower debt-to-capitalization ratio of 12.64%. BP plc (BP - Free Report) , another major player in the integrated energy space, is also reducing its debt load, which is backed by higher oil prices and decreased capital spending. BP’s debt-to-capitalization ratio is much higher at 40.08%.
Lithium: The Next Frontier for ExxonMobil
In addition to its traditional upstream and downstream energy operations, ExxonMobil is entering the lithium market, a critical component in electric vehicle batteries. The world is requiring more lithium to meet the growth in electric vehicles, and XOM is thus well-positioned to gain in the long run.
On June 25, ExxonMobil signed an agreement with SK On to supply up to 100,000 metric tons of lithium from its upcoming project in Arkansas. SK On will utilize this lithium in its U.S.-based electric vehicle battery manufacturing facility.
Is ExxonMobil’s Premium Stock Valuation Justified?
The positive developments have led to ExxonMobil’s premium valuations, as investors have high expectations for the company’s future growth, profitability, or other favorable conditions. Consequently, they are willing to pay a premium for the stock, believing it will continue to outperform both its peers and the broader market. Year to date, XOM has risen 14.1%, significantly outpacing the 3.5% increase seen in the industry’s composite stocks.
Image Source: Zacks Investment Research
However, there is some uncertainty surrounding the stock. The recent merger with Pioneer Natural, while enhancing ExxonMobil's production capacity, introduces potential risks in an already oversupplied market. This additional supply could exacerbate existing inventory surpluses, potentially leading to future oil price declines as production ramps up. Such market dynamics could adversely impact ExxonMobil's profitability and stock price stability.
Additionally, a legal dispute with Chevron over Hess Corporation’s (HES - Free Report) 30% stake in Guyana adds another layer of uncertainty. Although the downside appears limited, the outcome remains unpredictable and could affect ExxonMobil's strategic plans in Guyana.
Thus, though XOM’s long-term outlook remains strong, investors are advised to be cautious. Hence, instead of rushing to add XOM, carrying a Zacks Rank #3 (Hold), to their portfolios, it may be prudent to wait for a more opportune entry point. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
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Is ExxonMobil's Premium Stock Valuation a Buy, Sell or Hold?
Exxon Mobil Corporation (XOM - Free Report) is currently considered expensive on a relative basis, with the stock trading at a 6.01x trailing 12-month Enterprise Value to Earnings Before Interest, Taxes, Depreciation and Amortization (EV/EBITDA), which is at a premium compared with the broader industry average of 3.85x.
A premium valuation generally indicates that the market has strong confidence in the company’s prospects. However, this necessitates scrutiny to determine if this higher price is warranted.
Therefore, a more thorough analysis is needed to determine whether ExxonMobil's premium valuation is justified based on its fundamentals, growth prospects and prevailing market conditions.
Permian & Guyana: Key Drivers of ExxonMobil’s Future
With a strong focus on strengthening its presence in the Permian, ExxonMobil completed the acquisition of Pioneer Natural Resources Company on May 3. With 1.4 million net acres of the combined company in the Delaware and Midland basins, having an estimated 16 billion barrels of oil equivalent resource, ExxonMobil has greatly transformed its upstream portfolio.
The company expects that based on 2023 volumes, its production from the most prolific basin will more than double to 1.3 million barrels of oil equivalent per day (MMBoE/D). For 2027, the energy giant expects its Permian production volume to increase to 2 MMBoE/D.
Similar to its operations in the Permian, ExxonMobil boasts a robust project pipeline in offshore Guyana resources. The company is well-positioned to generate significant returns from both the Permian and Guyana due to low production costs in these assets. With oil prices remaining favorable this year, ExxonMobil is poised to generate substantial cash flows from its upstream operations, which contribute the majority to its total earnings.
ExxonMobil’s Integrated Business Model & Solid Balance Sheet
Due to its integrated business model, ExxonMobil is well protected when oil price turns low. This is because, apart from exploration and production activities, the company has an extensive footprint in refining and chemical businesses.
During uncertain times, ExxonMobil can rely on its robust balance sheet. Compared to the industry’s composite stocks, which have a debt-to-capitalization ratio of 22.56%, ExxonMobil maintains a much lower ratio at 13.52%. Favorable commodity prices have enabled it to enhance its financial position and repay the debt incurred during the pandemic.
Image Source: Zacks Investment Research
Chevron Corporation (CVX - Free Report) is another integrated energy giant with a strong balance sheet. Belonging to the same industry, Chevron has a much lower debt-to-capitalization ratio of 12.64%. BP plc (BP - Free Report) , another major player in the integrated energy space, is also reducing its debt load, which is backed by higher oil prices and decreased capital spending. BP’s debt-to-capitalization ratio is much higher at 40.08%.
Lithium: The Next Frontier for ExxonMobil
In addition to its traditional upstream and downstream energy operations, ExxonMobil is entering the lithium market, a critical component in electric vehicle batteries. The world is requiring more lithium to meet the growth in electric vehicles, and XOM is thus well-positioned to gain in the long run.
On June 25, ExxonMobil signed an agreement with SK On to supply up to 100,000 metric tons of lithium from its upcoming project in Arkansas. SK On will utilize this lithium in its U.S.-based electric vehicle battery manufacturing facility.
Is ExxonMobil’s Premium Stock Valuation Justified?
The positive developments have led to ExxonMobil’s premium valuations, as investors have high expectations for the company’s future growth, profitability, or other favorable conditions. Consequently, they are willing to pay a premium for the stock, believing it will continue to outperform both its peers and the broader market. Year to date, XOM has risen 14.1%, significantly outpacing the 3.5% increase seen in the industry’s composite stocks.
However, there is some uncertainty surrounding the stock. The recent merger with Pioneer Natural, while enhancing ExxonMobil's production capacity, introduces potential risks in an already oversupplied market. This additional supply could exacerbate existing inventory surpluses, potentially leading to future oil price declines as production ramps up. Such market dynamics could adversely impact ExxonMobil's profitability and stock price stability.
Additionally, a legal dispute with Chevron over Hess Corporation’s (HES - Free Report) 30% stake in Guyana adds another layer of uncertainty. Although the downside appears limited, the outcome remains unpredictable and could affect ExxonMobil's strategic plans in Guyana.
Thus, though XOM’s long-term outlook remains strong, investors are advised to be cautious. Hence, instead of rushing to add XOM, carrying a Zacks Rank #3 (Hold), to their portfolios, it may be prudent to wait for a more opportune entry point. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here