October 20, 2017

OPEC Cuts Should Help Exxon Mobil Rally

OPEC Cuts Should Help Exxon Mobil Rally

  • Some analysts in the commodities space have suggested that the current environment should equate to weakness in energy
  • Fundamental drivers still look favorable for energy demand
  • The strong dividend yield in XOM rewards patience even with the stock at current prices

Exxon Mobil Corp. (NYSE: XOM) closed at $88.44 on 10 October, up by almost 14 percent from the prices at the start of the FY 2016.  Some analysts in the commodities space have suggested that the current environment should equate to weakness in energy and metals but it is very hard to argue with these numbers when we make comparisons to other asset classes.  XOM is currently trading at a 34 PE multiple and we are now seeing a 52-week range of $71.55-95.55.  We are currently trading at the upper end of that range, so this has been used as an argument to suggest that we have already seen a top in the market valuations for Exxon Mobil.  The stock is one of the best options for those interested in commodities trading in stock markets.

Chart Outlook: Exxon Mobil (XOM) 1-Year Performance

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But when we look at the broader perspective, it can just as easily be argued that these latest declines offer investors a better opportunity to get long again at lower levels. Current stock prices indicate a dividend yield of 3.42 percent in XOM, which goes far in helping to offset any negatives that might be experienced in the share prices themselves.  Market trends in these areas have been forcefully bullish over the last year,so investors that are willing to take a longer-term view are more likely to receive the benefits that are associated with the stock.

Commodities Stocks

Exxon posted revenue growth of 20 percent for the quarter ending in June (relative to the previous quarter in FY2016), and these moves have largely tracked the price rises seen in crude oil prices.  This should not be surprising, as the company is involved in the entire spectrum of crude production, refinement, and petrochemical processing, and so the company is deeply impacted by the broader trends in crude oil prices. Recent reports show that Exxon Mobil produced 4.1 million barrel per day in crude oil for the first half of 2016 — more than even significant oil-producing countries like Iran, Canada, UAE, Kuwait and Venezuela.  Exxon also holds more than 25-million barrels of oil reserves, so the company looks to be relatively shielding from external shocks and geopolitical volatility.

Overall, crude prices have moved higher in the current FY on the back of stronger growth expectations the US, and growing demand from developing nations like India and China. Though, recent reports of record production in Iraq and the opening of Libya’s port outlets have pressured the outlook for oil prices and, this has led to some of the recent selling activity we have seen in Exxon stock.

Energy Markets Trends

So the real question here is whether or not these moves will be indicative of the broader trend.  But the last meeting of OPEC nations to curb oil production held in Istanbul suggests that oil could hit a high of $60 per barrel by the end of the year. This means that there is still about 20 percent upside left in the crude oil prices, and Exxon Mobil stands to be one of the key beneficiaries. The upcoming holiday season, along with a strengthening in economic activity means stronger demand for crude oil before the end of the current quarter.

By contrast, any failure to cut production by OPEC member nations could reduce oil prices by almost 20 percent, according to analyst reports from Goldman Sachs.  Additionally, the global oil market will remain in surplus in the fourth quarter of the current financial year. So rallies in XOM should not be taken as a given and there are still risks to the broader outlook.  But being the torchbearer of the oil-producing industry, XOM is the right candidate to take the advantage of potential rises in oil prices if the OPEC nation’s decisions to curb production comes to fruition.

 

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