The profits of oil companies soared last year as high demand and supply constraints arising out of the war between Ukraine and Russia pushed oil and gas prices higher. Exxon Mobil Corporation (XOM) was no different, as soaring energy prices helped it post record quarterly profits during the third quarter of last year.
As the company prepares to publish its third-quarter results for fiscal 2023, I have discussed why it could be wise to wait for a better entry point in the stock.
For the third quarter ended September 30, 2023, XOM’s EPS is expected to decline 47.4% year-over-year to $2.34. Similarly, its revenue for the same quarter is expected to decline 17.6% year-over-year to $92.35 billion. XOM has a solid earnings surprise history, surpassing the consensus EPS estimates in three of the trailing four quarters.
On July 13, 2023, XOM announced that it agreed to acquire Denbury, Inc., a developer of carbon capture, utilization, and storage (CCS) solutions and enhanced oil recovery.
XOM’s Chairman and CEO Darren Woods said, “Acquiring Denbury reflects our determination to profitably grow our Low Carbon Solutions business by serving a range of hard-to-decarbonize industries with a comprehensive carbon capture and sequestration offering.”
“The breadth of Denbury’s network, when added to ExxonMobil’s decades of experience and capabilities in CCS, gives us the opportunity to play an even greater role in a thoughtful energy transition, as we continue to deliver on our commitment to provide the world with the vital energy and products it needs,” he added.
On April 27, 2023, XOM announced that it had received government and regulatory approvals from the Guyana government for the Uaru project, with production targeted to begin in 2026. Uaru, the fifth project on Guyana’s Stabroek block, will have a daily production capacity of around 250,000 barrels after its production starts in 2026.
Oil prices have been rising since June after falling off from the highs of 2022. Oil prices have been soaring over fears of tight supplies arising out of production cuts by OPEC+ and Russia. Saudi Arabia has confirmed that it would continue its voluntary 1 million barrel per day (bpd) crude supply cut until the end of this year. Also, Russia will continue its current 300,000 bpd crude export cuts until 2023.
U.S. crude inventories fell by about 4.2 million barrels last week, exceeding the forecasts for a 92,000-barrel draw. On September 27, 2023, EIA’s data showed that gasoline demand rose slightly from 8.41 million to 8.62 million barrels per day. Still, it was below last year’s demand of 8.83 million bpd during the same week in September 2022.
Demand concerns arising from the likely economic slowdown make the future of crude oil prices uncertain. If demand fails to rise, it would negate the production cuts announced by the oil-producing nations, leading to a fall in crude oil prices.
XOM’s stock has gained 2.7% in price year-to-date and 23.2% over the past year to close the last trading session at $115.83.
Here’s what could influence XOM’s performance in the upcoming months:
Mixed Financials
XOM’s total revenues and other income for the second quarter ended June 30, 2023, increased 28.3% year-over-year to $82.91 billion. Its non-GAAP net earnings, excluding identified items, declined 55.1% over the prior year quarter to $7.87 billion. Its non-GAAP EPS came in at $1.94, representing a decline of 53.1% year-over-year.
For the six months ended June 30, 2023, XOM’s cash and cash equivalents at the end of the period increased 56.7% year-over-year to $29.56 billion.
Unfavorable Analyst Estimates
Analysts expect XOM’s fiscal 2023 and 2024 EPS to decline 33.4% and 2.7% year-over-year to $9.36 and $9.11, respectively. Its fiscal 2023 and 2024 revenue is expected to decline 14.2% and 0.1% year-over-year to $354.96 billion and $354.49 billion, respectively.
High Profitability
In terms of the trailing-12-month levered FCF margin, XOM’s 8.70% is 28.1% higher than the 6.79% industry average. Likewise, its 27.48% trailing-12-month Return on Common Equity is 27.4% higher than the industry average of 21.57%. Furthermore, the stock’s 1.01x trailing-12-month asset turnover ratio is 65.1% higher than the industry average of 0.61x.
Stretched Valuation
In terms of forward EV/EBITDA, XOM’s 6.48x is 14.9% higher than the 5.64x industry average. Likewise, its 9.48x forward EV/EBIT is 3.6% higher than the 9.15x industry average. Its 12.37x forward non-GAAP P/E is 21.1% higher than the 10.22x industry average.
POWR Ratings Reflect Uncertainty
XOM has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. XOM has a D grade for Value, consistent with its stretched valuation. Its 1.08 beta justifies its C grade for Stability.
It has a D grade for Sentiment, in sync with its unfavorable analyst estimates.
XOM is ranked #42 out of 88 stocks in the Energy – Oil & Gas industry. Click here to access XOM’s Growth, Momentum, and Quality ratings.
Bottom Line
Oil prices have recovered from the lows reached in the earlier part of the year. Despite production cuts announced by the Saudi Arabia-led OPEC+ and Russia, the demand outlook for oil remains uncertain, with the Chinese economy struggling and the overall uncertain macroeconomic environment. Moreover, a strong dollar could further dampen oil demand.
Therefore, amid the current uncertainties and considering XOM’s mixed financials, it could be wise to wait for a better entry point in the stock.
How Does Exxon Mobil Corporation (XOM) Stack Up Against Its Peers?
XOM has an overall POWR Rating of C, equating to a Neutral rating. You may check out the stocks within the Energy – Oil & Gas industry possessing an A (Strong Buy) and B (Buy) rating: Cheniere Energy, Inc. (LNG), Valero Energy Corporation (VLO), and CVR Energy, Inc. (CVI). To access more Buy-rated Energy – Oil & Gas stocks that are set to outperform, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
XOM shares were trading at $110.85 per share on Wednesday afternoon, down $4.98 (-4.30%). Year-to-date, XOM has gained 2.99%, versus a 11.57% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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