What happened
ExxonMobil (XOM 3.61%) stock hugely outperformed the S&P 500 and shot up 40% in the first half of 2022, according to data provided by S&P Global Market Intelligence. The oil stock has cooled off in July so far, but there's no reason to worry.
So what
Investors in oil and gas stocks made a killing in the first half of the year as crude oil prices skyrocketed. Prices of Brent crude -- the global benchmark -- as well West Texas Intermediate (WTI) crude -- the U.S. benchmark -- leapt past $100 per barrel each to multiyear highs in March as the global macroeconomic environment hugely favored the oil and gas market. The war between Russia and Ukraine in particular, and the consequent trade sanctions on Russia, threw oil supply out of whack right when global demand was recovering from the COVID-19 pandemic dip.
The setting was perfect for upstream oil and gas companies like ExxonMobil that benefit the most from higher oil prices. Oil's unrelenting rise pushed expectations from ExxonMobil higher, but the oil giant crushed even the loftiest estimates in the first half of the year.
Thanks to a monster fourth quarter, ExxonMobil generated $48 billion in cash from operations in 2021, the highest since 2012. It aggressively pared down debt worth nearly $20 billion and announced share repurchases of up to $10 billion beginning in the first quarter.
With its cash from operations surging another 60% year over year in the first quarter, ExxonMobil expanded its share repurchase program to $30 billion through 2023. To capitalize on the strong oil-price environment, ExxonMobil also laid out plans to increase production by 25% in the Permian Basin this year.
With ExxonMobil firing on all cylinders, several analysts turned bullish about the company and upgraded their price targets on the stock in recent months. Credit Suisse currently has among the highest price targets for the oil stock, with analyst Manav Gupta upping it to $125 per share in June, backed by ExxonMobil's investments in oil and gas projects at a time when several oil majors cut back capital spending. ExxonMobil stock was trading at around $84 a share at the time of this writing.
NYSE: XOM
Key Data Points
Now what
Fears of a recession and fresh COVID-19 lockdowns in China have pulled oil prices down sharply below $100 a barrel this month. On July 12, OPEC also projected demand for oil to drop in 2023.
Yet, ExxonMobil should still be able to deliver solid numbers for the rest of the year. Last year, the company cut its cost of production significantly and brought down its break-even oil price to just below $41 per barrel. By 2027, ExxonMobil expects to reduce its break-even cost by another $10 per barrel and double its earnings and cash flow potential.
With these cost reductions in place, there should be no pressure on the oil giant to generate enough cash flows to cover its capital projects and increase dividends annually even if oil prices crash by another 40%. Of course, ExxonMobil shares will most likely fall if oil prices fall, but it's also a top-notch Dividend Aristocrat that shouldn't disappoint those who buy it on the dip.
