Exxon Mobil Stock: Price Spikes (NYSE: XOM)

JHVEPhoto

By all accounts, Exxon Mobil (New York stock market :XOM) reported a quarter blowout, but the stock price is not recovering much. Investors should take note of how a stock is trading relative to the news flow, especially around an earnings report. My investment thesis is only slightly bullish as Exxon Mobil is trading at all-time highs while earnings are at peak levels.

tricky neighborhood

Energy prices around the world have crashed since the start of this year, when Exxon Mobil posted a second-quarter 2022 profit of $4.14 per share. The energy giant earned $17.6 billion in the second quarter and had told the market that third-quarter earnings would actually decline from those levels due to lower margins on energy products.

The company actually reported Q3’22 EPS of $4.45 per share with earnings of $18.5 billion. Exxon Mobil saw liquids prices hit earnings by $1.6 billion in the quarter, while gas prices boosted earnings by $2.0 billion. Ultimately, however, the energy products division made more than $0.5 billion in higher third-quarter profits after early forecasts suggested the division would see profits fall sequentially from the second quarter of 2022.

The stock is not recovering much as high natural gas prices are not sustainable, at least in the long term. Europe has already seen natural gas prices fall and Exxon Mobil will not repeat a period where natural gas price realizations soared 172% year-on-year from a period that was already well above the 10 year range.

Lower energy prices

Source: Exxon Mobil Q3’22 presentation

Reuters had reported Q3 natural gas price averages were $8.47/MMBtu and current prices in the United States have dropped significantly to $5.68/MMBtu. Much of the outsized natural gas gains will likely fade over the next year and return to decade-old price levels.

Nat.  Gas table

Source: Trade Economics

The energy giant produced a massive quarterly cash flow of $24.4 billion. Free cash flow was $19.3 billion due to soaring oil prices allowing Exxon Mobil to distribute $8.2 billion to shareholders via a larger dividend and minimal stock buybacks of 4 .5 billion dollars. The company was still able to service its debt in the third quarter due to excessive cash flow generated by high energy prices.

Cash Flow

Source: Exxon Mobil Q3’22 earnings release

Delicate stock

The stock rose only a few percentage points to $110 despite the impressive quarterly results. Investors are clearly concerned that normalized profits will return either when Russia leaves Ukraine completely or when Europe is able to establish reliable energy sources without the need for Russian supplies.

Exxon Mobil earned just $5.38 per share in 2021, when energy prices and industry margins were more normal. Analysts have earnings slipping back below $10 in the long run, wondering how the stock will recover far beyond the current price of $110. Even these analyst estimates look very high relative to more normalized energy prices.

The stock has a market capitalization of $450 billion, but the energy giant only spends about $15 billion on share buybacks a year. Exxon Mobil doesn’t seem that cheap given the limited ability or interest to buy back shares despite what some would consider a cheap stock price.

The company increased the quarterly dividend by 3.4% to $0.91 pushing the dividend yield up to 3.3% now. Net distribution yield (combining dividend yield and net redemption yield) was just 4.6% at the start of the quarter and will peak at around 6.6% with the new dividend and higher expected redemption.

Chart
Data by Y-Charts

The net payout yield gives a good indication of how the business has transformed over the past two years. The $110 stock looks much more fairly priced here. In the past, Exxon Mobil was priced in the $80s while my view was more negative on the stock.

The company is more reserved with capital spending eliminating past downside risks associated with overspending that drives energy prices sky high. The big question is valuation knowing that earnings will fall over the next two years and stock prices are not doing well in such an environment. The stock likely has about $10 upside from here, where the stock would trade at 12 times analysts’ EPS expectations for 2023 and 2024.

Carry

The key investor takeaway is that Exxon Mobil had a blowout quarter despite providing preliminary numbers showing declining sequential earnings. The stock likely has another $10 rise where investors need to exit positions and look to buy back at lower levels after energy prices normalize over the next two years.

Carol N. Valencia