Betting on top oil stocks has always been risky. The biggest challenge investors face when evaluating energy stocks is correctly predicting the direction of oil markets.
This, of course, is an almost impossible task given the extremely volatile nature of the commodity. Even if you’re a long-term energy bull, picking the right stock from among the energy "supermajors" has become more complicated given the uncertain, long-term, demand-supply outlook alongside the rising use of renewables, electric cars and a global push to curb climate change.
The performance of ExxonMobil shares reflects this challenging operating environment for the oil giants.
The stock has fallen 8% this year even as the price of brent crude has increased almost 50% from a year earlier.
Looking to add some oil and gas exposure to your portfolio? Should ExxonMobil (NYSE:XOM), the world's largest publicly traded oil producer, be on your list?
If your goal is to take short-term gains on rebounding oil prices, we don’t think Exxon is a good choice.
Different Growth Strategy
ExxonMobil has taken a long-term approach to improve its growth outlook, diverging from other large producers who are trying to stabilize their share prices by refraining from boosting major spending, instead putting more cash into investor pockets via share buybacks. Irrespective of bleak oil demand forecasts, Exxon CEO Darren Woods believes the oil and gas industry needs trillions of dollars of fresh investment to meet global demand for energy products by 2040.
With this in mind, Exxon is initiating one of the biggest expansions in its corporate history, spending $200-billion over the next seven years on low-cost mega-projects that will help maintain the company's dominance in oil and natural gas markets for decades. As part of this plan, Exxon will increase its currently minimal oil production in the U.S. Permian Basin five-fold, plus start 25 projects worldwide, which will add more than 1 million oil-equivalent barrels per day to the company's production volume. In 2017, ExxonMobil added 10 billion oil-equivalent barrels to its resource base in locations including the Permian, Guyana, Mozambique, Papua New Guinea and Brazil.
If all this materializes, and the price of oil remains around $60 a barrel, Exxon’s management expects the company will be able to double earnings by 2025. In the short-term, however, this impressive long-term growth plan has been a major drag on the company’s shares this year.
At a time when other integrated producers such as Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP), and Royal Dutch Shell (NYSE:RDSa), are increasing share buybacks and returning more cash to investors, Exxon is the only supermajor which didn't announce a share buyback program. Exxon shares have barely moved this year, while Chevron and Shell delivered 9% and 13% respectively in returns.
The company’s recent earnings also failed to cheer investors. The producer failed to meet expectations on earnings, cash flow, debt and output. Exxon also cut its full-year production target to the equivalent of 3.8 million barrels of crude from last year’s 4 million barrel output.
Bottom Line
If you’re looking to play the strength of oil markets in the recent cycle, we don’t think Exxon stock is an appropriate pick for you. To play this trade, you’re better off buying U.S.-based pure refiners, companies such as Phillips 66 (NYSE:PSX), Valero Energy (NYSE:VLO). and Marathon Petroleum (NYSE:MPC).
Phillips 66, for example, beat analyst expectations for the second quarter, more than doubling its earnings from a year earlier with 100% utilization at the company’s fuel processing plants. Valero Energy and Marathon Petroleum also beat expectations.
Exxon, on the other hand, is most appealing for long-term investors whose goal would be to lock in growing dividend income. The company has a diversified portfolio of assets that provide a superior hedge against the swings in oil prices. Exxon has increased its dividend payout every year for the past 36 years. With its 4.26% annual dividend yield—the highest since the mid-1990’s—Exxon stock, which closed yesterday at $77.93, is still a bargain for the buy-and-hold investors.