Exxon Mobil Corp (XOM) will gain from the spike in oil prices in Q3. Futures prices for WTI oil for Nov. 2023 delivery were at $69.23 per barrel on June 23. Today it is at $90 or so, a gain of 30%. This could push XOM stock significantly higher.
One reason is that this means that Exxon's free cash flow (FCF) will likely be significantly higher than Q2. I discussed this in my Aug. 29 Barchart article, “Exxon Stock Appeals to Value Investors and Short Put Traders.”
Free Cash Flow Growth at Exxon
For example, during Q2 the company generated $5 billion in FCF even after it raised its capex spending. Moreover, in the first half of 2023, Exxon produced $16.4 billion in FCF.
Granted, this was lower than during last year's first half ($27.74 billion). Part of this was due to a large one-tax payment as well as higher capex spending this year.
But in general, oil has been lower than last year - at least up until Q3. Now there has been a huge 30% spike in oil this quarter.
So, expect to see a large jump in the company's FCF for the quarter. It's possible that analysts have not completely incorporated that into their models yet, as they tend to be conservative.
For example, if the company holds its capex fairly stable, it's possible that the company could reach at least half to 60% of the $22 billion in FCF it made last year during Q3.
That implies the FCF for Q3 2023 could be as high as $11 billion to $13 billion. It could put the company on a trajectory to make $30 billion in FCF for the first 3 quarters of 2023, and potentially up to $50 billion for all of 2023.
Although that won't match the $62.1 billion in FCF it made during 2022, it is still a huge number. Moreover, it more than covers the $17 billion in share buybacks that Exxon plans on spending this year.
XOM Stock Price Target
This could lead to a significant spike in XOM stock. Let's assume, for example, that Exxon will make $44 billion in FCF during 2023, or double what it made in the first half.
This means that Exxon's market capitalization could rise to $586.7 billion, up from $464 billion today. That is calculated by using a 7.5% FCF yield. For example, if we divide $44 billion by 7.5% we get a target market cap of $586.7 billion.
This is also the same thing as multiplying its $44 billion FCF estimate by 13.3x (i.e., 1/0.075 = 13.3). So $44 billion x 13.3b equals $586.7 billion.
This implies a potential 26.4% rise in XOM stock to $147.33 per share.
Moreover, Exxon is likely to raise its quarterly dividend in late October when it announces its next dividend payment. This is because it has paid 91 cents each quarter for the past 4 quarters.
Exxon has had 24 years of consistently raising its dividend annually, according to Seeking Alpha. This could also push XOM stock higher as well.
For example, if the dividend rises to 94 cents quarterly or $3.76 annually, and if the yield reaches 3.0%, XOM stock could reach $125, up from $116.92 today.
Shorting OTM Puts for Extra Income
Another way to play this to gain extra income is to sell short out-of-the-money (OTM) puts in near-term expiration periods. For example, in my last article, I discussed selling short the $104 strike price put options that expire on Sept. 22.
The premium at the time was 78 cents and the strike price was over 4.7% below the spot price. Today, those puts are set to expire worthless. This means that the investor kept all the income (a 0.75% immediate yield) and had no obligation to buy the stock at $104.00.
Going forward, investors might want to consider selling short the $111.00 strike price put options that expire on Oct. 13. That expiration period is 21 days from now and the strike price is 4.6% below today's price (i.e., it's out-of-the-money).
Moreover, the premium received from selling short those put options is 68 cents. That works out to an immediate yield of 0.61% for just 3 weeks. If this can be repeated every 3 weeks for a year (i.e., 17 times), the annualized expected return (ER) is over 10% (i.e., 0.61% x 17 = 10.37%).
This shows that an investor can make good money selling short OTM puts while they wait for the company's Q3 results. Moreover, there is a good likelihood that XOM stock still has further to rise based on its powerful FCF and a potential dividend hike.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
