After Exxon Mobile’s 61% Rally This Year Is It Time To Take Profit On The Stock?
2022.06.07 08:51
- Exxon Mobil stock is among the best trades in the post-pandemic economic recovery
- As the rally in oil markets continues, analysts are becoming nervous about rating XOM stock a buy at the current high levels
- Energy is a cyclical sector, with every peak followed by a sharp downside
Shares of US energy giant Exxon Mobil (NYSE:XOM) have had a remarkable run during the past two years. After surging 67% in 2021, the Irving, Texas-based company has gained another 61.2% this year, making the stock as one of the best trades in the post-pandemic environment. Shares of XOM closed on Monday at $98.84.
XOM Weekly Chart
The primary driver behind this rally is an extremely tight oil market. This year, Brent crude futures have climbed more than 50% to around $120 a barrel, primarily due to a combination of soaring energy demand and tight global oil supplies—a trend that accelerated after Russia invaded Ukraine.
But as the rally continues, analysts have grown increasingly nervous about rating XOM stock a buy at current levels, suggesting that there’s little upside from here, and the rally has already run its course.
In an Investing.com survey of 29 analysts, 18 rated XOM stock as neutral; one rated it a sell, and just 10 consider it a buy.
XOM Consensus Estimates
Their 12-month consensus target now implies more than a 2% downside, which is a sharp reversal from an earlier consensus when most forecasters predicted more gains.
One major reason for this change of heart seems to be the growing concern that the global economy is slowly moving towards a recession caused by surging inflation and central banks’ aggressive moves to tighten monetary conditions.
US and European stock markets are pricing in a 70% chance that the economy will slide into recession in the near term, according to estimates by JPMorgan. Recession warnings have been bubbling for months this year amid the war in Ukraine, coronavirus lockdowns in China, and a more hawkish Federal Reserve.
These expectations directly impact the energy sector, which is highly cyclical, with every peak followed by a sharp downside. Periods of high prices either lead to more drilling or damped demand until the commodity’s price falls.
A Re-Rating Story
It has been a little over two years since the most recent trough, when oil futures briefly went negative during the height of the pandemic-induced demand destruction in the fall of 2020. XOM’s price has about tripled since that slump.
Although it’s almost impossible to predict when energy markets will take a turn, there are strong signs suggesting that Exxon has become a much better long-term pick and an investor-friendly company after a significant restructuring.
Exxon continues to cut costs, creating a larger cushion to cover its dividend bill—the stock currently yields 4.06% and shareholders receive $3.56 per share annually. That’s the third-highest yield among stocks listed on theS&P 500 Index.
The oil giant plans to save an extra $3 billion in costs by the end of next year to boost shareholder returns and take advantage of high oil prices.
The new saving measures will likely cut costs by $10 a barrel. That would be enough to pay for 60% of the company’s dividend. According to Exxon, the savings will help double earnings and cash flow “potential” by 2027 while boosting returns.
In a note last week, JPMorgan reiterated Exxon as overweight, saying Exxon is a “re-rating story” that “still has legs.” Its note said:
“We think XOM still has room for more valuation re-rating following its de-rating in the 2020 downturn, which had been driven by heavy committed capital investment and concerns around the balance sheet at the time.”
In addition, Exxon’s substantial refining operations and its presence in the Permian basin have the potential to supercharge profits in the future.
According to Devin McDermott, an equity analyst at Morgan Stanley, refining margins are skyrocketing due to low refined product inventory levels globally, just as demand for products—such as jet fuel and gasoline—is recovering. Margins are likely to remain strong going forward, especially if the world keeps shunning imports of refined products from Russia.
Bottom Line
XOM stock may look like a fruit that has already ripened after a powerful rally over the past two years. But if your investment objective is long-term, there are many reasons to believe that this rally still has gas in the tank.
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