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Beaten Down, Can ExxonMobil (XOM) Make a Comeback in 2018?
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Integrated energy stocks have been flying high on elevated oil prices, driven by robust global demand and tight supplies. The resurgence in oil prices on the one hand and strong cash flow from operations on the other helped the sector.
Riding on the momentum, shares of oil majors such as Chevron Corporation (CVX - Free Report) and Royal Dutch Shell plc hit their 52-week high levels on Tuesday.
With oil slowly on the mend, shares in energy companies have recovered from their steep slump. At around $60 now – two-and-a-half-year highs – the contract has more than doubled from the dark days of February 2016 when the commodity fell to a 12-year low of just over $26 per barrel. Naturally, this has resulted in a major improvement in Chevron and Shell’s fundamentals, and subsequently their share prices.
Shares of Chevron hit a more than three-year high of $126.14 on Dec 26, while Europe’s largest oil company, Shell, rose to another 52-week high of $66.55. Year to date, Chevron and Shell have seen their shares climb 6.6% and 22.5%, respectively.
In sharp contrast to these gains, the year 2017 has been a comparatively unfruitful one for the world’s largest publicly traded oil company ExxonMobil Corporation (XOM - Free Report) , which still continues with its bumpy ride. The stock has lost 7.5% so far this year. That said, we have noticed that ExxonMobil has underperformed the industry in each of the one-month, three-month and one-year time frames.
Let’s take a look at the factors that have adversely affected the price of the Zacks Rank #3 (Hold) stock. (Looking for the Best Stocks for 2018? Be among the first to see our Top Ten Stocks for 2018 portfolio here.)
Falling Production: ExxonMobil is suffering from marginal or falling returns, reflecting its struggle to replace reserves, as access to new energy resources becomes more difficult. Given the large base, achieving growth in oil and natural gas production is anyways a challenge for the company over the last many years.
During the January-September period, the Irving, TX-based oil and natural gas powerhouse ExxonMobil’s production averaged 3,983 thousand oil-equivalent barrels per day (MBOE/d), down 1.2% from the first nine months of 2016.
Lower Liquids Split: Compared to the other supermajors, ExxonMobil is somewhat less leveraged to global crude prices in that 58% of its total production comes from liquids. This is lower than approximately 60% for both Chevron and Shell and has worked to ExxonMobil’s disadvantage amid rebounding oil prices.
High Natural Gas Exposure: With natural gas prices trading under $3 per MMBtu and ExxonMobil being the second largest producer in the U.S., the company's earnings and revenues continue to feel the heat.
Offshore Dependence: The upstream activities of Exxon are heavily dependent on offshore resources. However, drilling in those areas is getting excessively expensive, which has dented the company’s cashflow to a certain extent. ExxonMobil could have made more profit had it boosted onshore operations in lucrative domestic shale resources - where most of the explorers have been gathering over the last few years.
Can the Tables Turn for ExxonMobil?
ExxonMobil has a leading position in the energy industry owing to the size and diversity of its asset base, both in terms of business mix and geographical footprint. With a stable cash position, the company’s balance sheet is one of the best in the industry, reflecting declining debt load over the first nine months of 2017. Overall, we expect the company to put up a better performance in 2018 based on the following factors.
Jump in Profits: ExxonMobil reported net earnings of $11.3 billion in the first nine months of 2017, up 84% from the year-ago corresponding period income of $6.2 billion.
Strong Cash Flow from Operations: In the last nine months, ExxonMobil reported a sharp year-over-year increase in cash flow from operating activities, which is a key metric to gauge the financial health of the firm. The company generated $24.4 billion in cash flow compared to $16.9 billion recorded in the year-ago period - enough to pay off debt along with funding capex and dividend payments.
A Dividend Aristocrat: The diversified oil company has a long and consistent dividend paying record. It is one of the only two energy stocks on the list of Dividend Aristocrats - a group of 51 companies in the S&P 500 Index that have raised their payouts for more than 25 years in a row. ExxonMobil has increased its dividend for 34 consecutive years.
Impending Merger of its Merge Refining & Marketing Divisions: ExxonMobil plans to merge its two separate business units – ExxonMobil Refining and Supply Company and ExxonMobil Fuels, Lubricants & Specialties Marketing Company – into ExxonMobil Fuels & Lubricants Company. The reorganization will enable the company generate more cash flow from downstream activities – helping the energy giant to counter the volatility in its upstream business.
Beneficiary of a Lower Tax Rate: ExxonMobil is set to benefit from the recent tax reform bill that is set to reduce the corporate income tax rate from 35% to 21%. With the energy company identified as one of the highest taxed U.S. corporations (shelling out more than 40%), the new tax regime is likely to result in a jump in ExxonMobil’s potential earnings.
Our Outlook
While we expect in-line returns from ExxonMobil in the next few months, it may be a good decision to keep this stock in your portfolio, particularly if you have a long-time horizon to wait.
Headquartered in Stavanger, Norway, Statoil is a major international integrated oil and gas company. Though the company has operations in all major hydrocarbon-producing regions of the world, it has an upstream focus on the Norwegian Continental Shelf. Statoil’s expected EPS growth rate for three to five years currently stands at 24.2%, comparing favorably with the industry's growth rate of 8.5%.
Wall Street’s Next Amazon
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
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Beaten Down, Can ExxonMobil (XOM) Make a Comeback in 2018?
Integrated energy stocks have been flying high on elevated oil prices, driven by robust global demand and tight supplies. The resurgence in oil prices on the one hand and strong cash flow from operations on the other helped the sector.
Riding on the momentum, shares of oil majors such as Chevron Corporation (CVX - Free Report) and Royal Dutch Shell plc hit their 52-week high levels on Tuesday.
With oil slowly on the mend, shares in energy companies have recovered from their steep slump. At around $60 now – two-and-a-half-year highs – the contract has more than doubled from the dark days of February 2016 when the commodity fell to a 12-year low of just over $26 per barrel. Naturally, this has resulted in a major improvement in Chevron and Shell’s fundamentals, and subsequently their share prices.
Shares of Chevron hit a more than three-year high of $126.14 on Dec 26, while Europe’s largest oil company, Shell, rose to another 52-week high of $66.55. Year to date, Chevron and Shell have seen their shares climb 6.6% and 22.5%, respectively.
In sharp contrast to these gains, the year 2017 has been a comparatively unfruitful one for the world’s largest publicly traded oil company ExxonMobil Corporation (XOM - Free Report) , which still continues with its bumpy ride. The stock has lost 7.5% so far this year. That said, we have noticed that ExxonMobil has underperformed the industry in each of the one-month, three-month and one-year time frames.
Let’s take a look at the factors that have adversely affected the price of the Zacks Rank #3 (Hold) stock. (Looking for the Best Stocks for 2018? Be among the first to see our Top Ten Stocks for 2018 portfolio here.)
Falling Production: ExxonMobil is suffering from marginal or falling returns, reflecting its struggle to replace reserves, as access to new energy resources becomes more difficult. Given the large base, achieving growth in oil and natural gas production is anyways a challenge for the company over the last many years.
During the January-September period, the Irving, TX-based oil and natural gas powerhouse ExxonMobil’s production averaged 3,983 thousand oil-equivalent barrels per day (MBOE/d), down 1.2% from the first nine months of 2016.
Lower Liquids Split: Compared to the other supermajors, ExxonMobil is somewhat less leveraged to global crude prices in that 58% of its total production comes from liquids. This is lower than approximately 60% for both Chevron and Shell and has worked to ExxonMobil’s disadvantage amid rebounding oil prices.
High Natural Gas Exposure: With natural gas prices trading under $3 per MMBtu and ExxonMobil being the second largest producer in the U.S., the company's earnings and revenues continue to feel the heat.
Offshore Dependence: The upstream activities of Exxon are heavily dependent on offshore resources. However, drilling in those areas is getting excessively expensive, which has dented the company’s cashflow to a certain extent. ExxonMobil could have made more profit had it boosted onshore operations in lucrative domestic shale resources - where most of the explorers have been gathering over the last few years.
Can the Tables Turn for ExxonMobil?
ExxonMobil has a leading position in the energy industry owing to the size and diversity of its asset base, both in terms of business mix and geographical footprint. With a stable cash position, the company’s balance sheet is one of the best in the industry, reflecting declining debt load over the first nine months of 2017. Overall, we expect the company to put up a better performance in 2018 based on the following factors.
Jump in Profits: ExxonMobil reported net earnings of $11.3 billion in the first nine months of 2017, up 84% from the year-ago corresponding period income of $6.2 billion.
Strong Cash Flow from Operations: In the last nine months, ExxonMobil reported a sharp year-over-year increase in cash flow from operating activities, which is a key metric to gauge the financial health of the firm. The company generated $24.4 billion in cash flow compared to $16.9 billion recorded in the year-ago period - enough to pay off debt along with funding capex and dividend payments.
A Dividend Aristocrat: The diversified oil company has a long and consistent dividend paying record. It is one of the only two energy stocks on the list of Dividend Aristocrats - a group of 51 companies in the S&P 500 Index that have raised their payouts for more than 25 years in a row. ExxonMobil has increased its dividend for 34 consecutive years.
Impending Merger of its Merge Refining & Marketing Divisions: ExxonMobil plans to merge its two separate business units – ExxonMobil Refining and Supply Company and ExxonMobil Fuels, Lubricants & Specialties Marketing Company – into ExxonMobil Fuels & Lubricants Company. The reorganization will enable the company generate more cash flow from downstream activities – helping the energy giant to counter the volatility in its upstream business.
Beneficiary of a Lower Tax Rate: ExxonMobil is set to benefit from the recent tax reform bill that is set to reduce the corporate income tax rate from 35% to 21%. With the energy company identified as one of the highest taxed U.S. corporations (shelling out more than 40%), the new tax regime is likely to result in a jump in ExxonMobil’s potential earnings.
Our Outlook
While we expect in-line returns from ExxonMobil in the next few months, it may be a good decision to keep this stock in your portfolio, particularly if you have a long-time horizon to wait.
Meanwhile, one can look at Zacks Rank #1 (Strong Buy) stock like Statoil ASA . You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Headquartered in Stavanger, Norway, Statoil is a major international integrated oil and gas company. Though the company has operations in all major hydrocarbon-producing regions of the world, it has an upstream focus on the Norwegian Continental Shelf. Statoil’s expected EPS growth rate for three to five years currently stands at 24.2%, comparing favorably with the industry's growth rate of 8.5%.
Wall Street’s Next Amazon
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
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