Exxon Mobil set to gain from Q3 oil price surge and potential dividend increase

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Exxon Mobil Corp. (NYSE:XOM) is poised to benefit from a substantial 30% rise in oil prices in Q3, with futures for West Texas Intermediate (WTI) oil for November 2023 escalating from $69.23 per barrel on June 23 to around $90 currently. This increase could potentially trigger a significant rise in Exxon's stock.

The company's free cash flow (FCF) for Q3 is projected to be considerably higher than the previous quarter, largely due to the surge in oil prices. In Q2, Exxon generated $5 billion in FCF, even after raising its capital expenditure (capex). In the first half of 2023, Exxon produced $16.4 billion in FCF, which was lower than the $27.74 billion generated during the same period in 2022, partly due to a large one-time tax payment and increased capex.

If Exxon maintains its capex at a stable level, it could potentially achieve between 50% to 60% of the $22 billion in FCF it made during Q3 last year. This implies that the FCF for Q3 2023 could range between $11 billion and $13 billion. If this occurs, Exxon could be on track to generate $30 billion in FCF for the first three quarters of 2023 and possibly up to $50 billion for the entire year. Although this won't match the $62.1 billion in FCF generated during 2022, it would more than cover the $17 billion that Exxon plans to spend on share buybacks this year.

Exxon's market capitalization could potentially rise to $586.7 billion from its current value of $464 billion if it generates $44 billion in FCF during 2023. This estimate is based on a 7.5% FCF yield or multiplying its FCF estimate by 13.3x, implying a potential 26.4% rise in Exxon's stock price to $147.33 per share.

In addition to the potential boost from FCF, Exxon is likely to increase its quarterly dividend in late October when it announces its next payment. The company has a track record of raising its dividend annually for 24 years. If the dividend increases to 94 cents quarterly or $3.76 annually and if the yield reaches 3.0%, Exxon's stock could rise to $125, marking an increase from the current price of $116.92.

Investors also have the opportunity to generate extra income by selling short out-of-the-money (OTM) puts in near-term expiration periods. For instance, selling short the $111.00 strike price put options that expire on October 13 could provide an immediate yield of 0.61% for just three weeks. If this strategy is repeated every three weeks for a year (17 times), the annualized expected return could exceed 10%. This strategy suggests that investors can earn significant returns while waiting for Exxon's Q3 results, particularly as there is a strong likelihood that Exxon's stock still has room to grow due to its robust FCF and potential dividend increase.

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