Shares of the US energy giant Exxon Mobil (NYSE:XOM) have been on a massive bull run for more than a year now. After surging 67% in 2021, the Irving, Texas-based company gained another 35.8% year-to-date, outperforming all three major US indices. The stock closed Monday at $83.16.
While the current rally has been enough to recover all COVID-inflicted losses, shares of Exxon are still far from their historical closing high of $104.38, recorded in June 2014, when the largest US oil producer was also the world’s most valuable company.
Since then, Exxon’s shares have disappointed long-term investors, lagging the S&P 500 by more than 200 percentage points during the past 10 years.
The company’s removal from the Dow Jones Industrial Average in August 2020, after nearly a century on the 30-component blue-chip index, marked a milestone in that decline.
However, the current bullish run leaves many investors wondering whether Exxon is now a good long-term investment, especially when the macroeconomic setup looks favorable for further gains.
Brent, the international benchmark, is more than 60% higher when compared to last year, propelled by the Russia-Ukraine conflict and robust global demand in the post-pandemic environment.
Riding on this commodity rebound, Exxon posted its largest profit in almost eight years when it reported its fourth quarter earnings last February.
Net income adjusted for one-time items was $2.05 a share, $0.11 above the average of analyst estimates. Exxon also paid down $9 billion in debt, reducing outstanding obligations to pre-pandemic levels.
More Cost Cuts Coming
With energy prices still higher when compared with last year, 2022 might be even more profitable for the company. Analysts expect Exxon to report a 45% jump in first quarter sales when it reports its latest earnings later this month.
Furthermore, Exxon continues to cut costs, creating a larger cushion to cover its dividend bill, the third highest in the S&P 500 Index. Last month at its Investor Day, the company announced that it 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.
Structural costs will decrease by $9 billion by the end of 2023 compared with four years earlier, a 50% increase from the previous target, the company said in a statement. The new savings would reduce costs by $10 a barrel and 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.
These measures encourage long-term investors whose primary objective for owning Exxon is to earn dividends. The stock currently yields 4.23%. However, investors should also note that XOM stock may have already hit the peak in the current cycle, given the increasing uncertainty about the economic growth and demand outlook.
Some economists now believe that the global economy may enter into a recession later this year as global central banks in the US and other major economies hike interest rates to curb soaring inflation.
That is perhaps why the consensus rating on XOM stock is neutral, according to an Investing.com poll of 29 analysts.
Source: Investing.com
Bottom Line
Exxon’s stock price, in our view, reflects the current bullish outlook for energy markets, where the prices of oil and gas have seen a significant turnaround since the start of the year. That said, Exxon’s financial situation is much stronger, making its dividend a safe bet for long-term, income-seeking investors. However, in our view, interested investors should wait on the sidelines for a better entry point.