It's been a volatile ride for shares of energy giant Exxon Mobil (XOM) since they set a closing high of $120.20 in late September. Thanks to a combination of sharp downside in crude oil prices to start October, investor concerns over the company's acquisition of Pioneer Natural Resources (PXD) for $60 billion, and flaring geopolitical tensions in the Middle East, XOM gave up a quick 13% from peak to trough earlier this month.
While the shares have recovered from their recent lows around $104, they're still down about 7% from their highs of less than a month ago.
Setting aside for the moment XOM's relationship to daily price swings in crude futures (CLX23), investors are generally wary of big-ticket acquisitions - like the PXD buy - as it can be difficult to integrate the companies and benefit from expected synergies or cost efficiencies. Moreover, these acquisitions are often funded by debt, resulting in higher interest costs and lower profit margins.
And in recent months, the Federal Reserve has increased interest rates at an accelerated pace to offset inflation, leaving the benchmark lending rate at its highest in decades. Against this backdrop, the prospect of a large acquisition clearly rattled Exxon investors' nerves - especially given the sudden pullback in oil prices that occurred simultaneously on rising macroeconomic concerns.
Given these factors, let’s see if you should invest in XOM right now.
How Will the Acquisition Benefit Exxon Mobil?
Once Exxon Mobil completes the acquisition of Pioneer Natural Resources, it will be able to increase daily oil production significantly. In fact, Exxon Mobil’s oil production is expected to be 50% higher than its nearest competitor. A quick turnaround in reducing or increasing oil production is extremely useful, given the rapid fluctuations in oil prices.
Previously, several energy companies raised doubts over the ability of oil wells in the Permian Basin to deliver consistent production of crude oil. This allowed smaller players, such as Pioneer, to rapidly scale production in these oil wells - and the Permian is now among the most prolific basins in the U.S.
As such, Exxon Mobil expects the deal to transform its upstream portfolio, more than doubling its footprint in the Permian basin while creating an undeveloped inventory position in the U.S. The energy heavyweight expects to generate double-digit returns by recovering resources efficiently.
According to Exxon Mobil, the cost of supply will be lower than $35 per barrel from Pioneer’s assets, allowing it to report outsized profits when oil prices remain elevated. Exxon Mobil emphasized that short-cycle barrels will account for 40% of upstream volumes by 2027, positioning the combined entity to quickly respond to changes in demand and increase the capture of price and volume upside.
What to Expect from Exxon's Earnings
Valued at a market cap of $440.15 billion, Exxon Mobil is among the largest companies in the world. Its diversified earnings base allows Exxon to pay shareholders an annual dividend of $3.64 per share, indicating a yield of 3.31%. These payouts have increased by 5.5% annually in the last 30 years, showcasing the resiliency of its business model.
Recently, Exxon Mobil stated higher oil prices should increase its upstream earnings by $900 million in Q3 of 2023. It expects total operating profits in the September quarter to range between $8.3 billion and $11.4 billion, compared to estimates of $9.2 billion.
In the year-ago period, Exxon Mobil reported profits of $19.7 billion, thanks to higher oil prices and steeper profit margins in its refining business. Comparatively, in Q2, its adjusted earnings stood at $7.9 billion.
Prices for Brent oil, which is the global benchmark, rose 30% in Q3 to $97 per barrel. This should allow Exxon Mobil to increase profits by more than $1 billion in Q3. Moreover, higher natural gas prices should add between $200 million and $600 million in quarterly profits for the company in Q3, which will offset weaker performance in the chemicals segment.
XOM is due to report Q3 earnings on Oct. 27.
What Do Analysts Expect for Exxon Mobil Stock?
Analysts seem generally optimistic about the Pioneer acquisition, with most anticipating that any potential FTC scrutiny will ultimately result in approval of the merger.
In particular, analysts at Truist upgraded the stock to “hold” from “buy" on the news, and upped XOM's price target to $131 from $110.
“While the addition of the new company does not result in material near-term accretion, we believe future years could see a more sizable benefit. However, we believe the pro-forma company deserves a premium earnings multiple and cash flow yield given scale and likely well productivity second to none,” wrote the analysts in a research note.
Priced at 12x forward earnings, XOM appears reasonably valued at current levels.
Out of the 17 analysts covering Exxon Mobil, eight recommend “strong buy,” and nine recommend “hold.” Wall Street has a 12-month average price target of $127.69, which is about 15% higher than the current trading price.
