Exxon: A Stodgy Blue Chip Awakens
I bought Exxon Mobil when oil futures bottomed near $45 a barrel. As yet agnostic, I picked out a handful of ragamuffins, too, March, 2020. Stocks like Halliburton, U.S. Steel, Alcoa, even Macy’s and Freeport-McMoRan sold as if bankruptcy lay around the corner for them.
Exxon then touched down at $30, now $80. Same period, the S&P 500 rose from 2,092 to 4,500, but Exxon outperformed. My ragamuffins sprinted around the clock a couple of times.
Exxon sells at 6 times cash flow which is what cheap oil stocks sell for these days. This is mainly an upstream producer of which two-thirds of production rests abroad. The swing in refined products earnings remains viciously cyclical while the chemicals business normally maintains its earnings power.
What’s my dream? The stock has already doubled off its year ago level in the forties. Still yields over 4% and sells at a reasonable multiple of perceived earnings power. You can’t just own trillion-dollar tech houses whose earnings are unpredictable, impossible to model in a detailed spreadsheet.
I pray for oil futures to hang in between $90 and $100 a barrel because futures are the leading indicator on whether Exxon can still outperform as a stock for at least another year or more. This is a $300 billion market capitalization piece of paper, unlikely to approach trillion-dollar status for the next couple of decades.
The bull case for Exxon: Free cash flow stays over $50 billion. Oil futures hold above $90 a barrel. Refinery margins wax fatter along with a good working environment for chemicals profitability. Historically such a scenario rarely lasts for more than a couple of years in succession. If you don’t expect crude oil prices to levitate from here, the stock can top out no higher than $90, now $80. In 2020 Exxon sustained an operating loss of $23.5 billion. Serious money. This is a dangerous cyclical that you must buy right and sell right with no regrets.
Early in 2020, commodity stocks had broken down into single digits. I bought them because I believed it was bottom-of-cycle time. Oil futures traded in the forties, half of where we tick at today. Near yearend, 2020, Exxon Mobil made a double-bottom near $30 a share. This is the same piece of paper now trading at $80, yielding over 4%. In the fourth quarter of 2020 it earned two cents a share, but now shows a quarterly run rate of $2.
What’s to be made of Exxon Mobil today? What’s its risk-gain ratio here? Last week, the day they red-dogged, Meta Platforms, Microsoft eased 3% but Exxon shed under a dollar while Alcoa snapped back $4, over 6%. U.S. Steel was unchanged but Netflix crashed. There was money for non-tech growthies like UnitedHealth Group, up $9. Still leggy.
Futures need to track in the eighties for anyone to reconfirm his bullish point of view on Exxon. They need to show earnings power near $2 a share quarterly. This would bolster management rationale to increase the dividend modestly to $4, nudging yield up to 5% on the present price of $80. Such action isn’t likely before yearend, after management reviews operating numbers and assesses the new year’s outlook. I can see the dividend bumped up to $4 a share, annualized. This provides a 5% yield on the current price, enough to maintain shareholder confidence.
Lemme deal with the bear case for oil: Futures peak near $90 and then decline below $80. Exxon’s earnings from oil drop 20% along with refined products and chemicals. What looked earlier like at least $8 a share in earnings, becomes $6. The stock declines to $60, to no more than 10 times perceived earnings. This is stock shrinkage of 25%. The upside seems about 25%, too. Exxon reaches par on consensus expectations of $9 a share in earnings capacity.
Exxon Mobil 20-Year Chart
At the first whiff of fish I’m gone. When I pulled up the long-term chart I was surprised to see its range. When oil futures dropped as low as $45, the stock based below $20. Exxon peaked over par in 2013. Then, I scanned back to the eighties and early nineties when the stock ranged below $10, yes $10 a share. Net, net, this is a tough rollercoaster ride. I see dividend paying capacity governing the trajectory of Exxon next couple of years. Marry for life and you’re bound to be disappointed, but maybe good for the next 12 months or so, a coincident indicator with oil futures.
The overnight wipe-out in Meta Platforms (Facebook) totted up to nearly $250 billion which approaches total market capitalization for Exxon. This creation of John D. Rockefeller dates back to mid-19th century times. Today, how leverage playing reasonably priced Waspy properties? I added to my bank stock holdings. Elevated interest rates can carry this group. Bank of America, Citigroup, Morgan Stanley and Goldman Sachs can carry the ball.
When reading any annual reports where management talks about how well your company is doing, just remember, it’s their company, not your company. Last time Exxon Mobil hit $100 was in 2013, and then wound its way down to around $30. Not exactly something to fall in love with for life.
Early eighties, Paul Volcker put up interest rates to 15% and created a huge recession, Exxon then practically fell off the page at 3 bucks and change. The stock didn’t see $40 until 1999. By 2007 it practically touched par, flopped down below $60 in the credit meltdown of 2008 - ‘09. Then, it recovered to par in the good economy, early 2014, but ran out of gas and stuttered down below $40.
Net, net, I see the risk-gain ratio here as 20 up to 40 down. Make this kind of call, and you’re supposed to bang out the goods with the stock ticking at $80 presently. Alcoa, which has tripled for me, still sells at 8 times forward earnings. Past 5 years, Microsoft’s steep trajectory took it from $50 to over $300 with no correction much more than 10%. That’s a stock! Own the best.