Over the past year, ExxonMobil's (XOM 0.02%) stock has rocketed higher by 48%, outdistancing all of its closest peers and the broader market, with the S&P 500 index falling around 7% over that span. Driving that stock performance strength has been a very strong business. It's also why investors need to step back and question whether or not the impressive stock gains can keep going.
What a year for ExxonMobil!
In 2022, energy giant ExxonMobil reported adjusted earnings per share of $14.06, up from $5.38 in the previous year. That's an impressive comparison, backed by sizable production growth in key regions (up over 30% in Guyana and in the Permian basin), strong refining results ("best-ever annual refining throughput in North America"), and even some solid advances on the environmental front ("Permian assets achieved zero routine flaring"). Just about any way you cut it, ExxonMobil had a year to be proud of.
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Also notable, the company strengthened its balance sheet by paying down debt. Only one major peer has a stronger financial position (Chevron has no debt at the moment). ExxonMobil's roughly 0.2 times debt-to-equity ratio would be considered strong for any company in just about any industry. And the board hiked the dividend again, bringing the consecutive streak of annual increases to a very impressive 40 years. Now add in a 3% dividend yield, which is well above the 1.6% you'd get from the average S&P 500 stock, and you might wonder if ExxonMobil is a buy today.
You should tread very carefully!
Meanwhile, back in 2020
The problem with ExxonMobil is that it operates in the highly cyclical energy industry. And while it has a diversified business, geographically and within the energy sector itself, oil and natural gas prices are still the driving force behind the company's top and bottom lines. Volatility is the norm when it comes to energy prices, which have a habit of moving both dramatically and swiftly. To find out just how bad it can get, investors only need to look back to 2020.
Just a short while ago, 2020 was marked by the spread of the coronavirus. Countries around the world effectively shut down their economies in an effort to limit the human impact of this illness, leading to a swift decline in energy demand. Oil prices plunged, with devastating effects on the financial results of energy companies like ExxonMobil. To put a number on that, ExxonMobil lost $0.33 per share that year. There was good reason for that, but long-term investors need to step back and think about how recent that dreadful performance was compared to last year's strong results.
This type of performance swing will happen again if history is any guide, so buying when times are good probably isn't the best option when it comes to ExxonMobil (or any of its integrated energy peers). However, there's a good reason to keep this company on your wish list. Remember the impressive debt-to-equity ratio from above? When times were tough in 2020, ExxonMobil continued to support its business and dividend because it leaned on its balance sheet to provide the needed cash. At the start of 2021, Exxon's debt-to-equity ratio was roughly twice its current level.
Muddling through industry downturns so it can thrive during upturns is the basic model, all built on a strong financial foundation. That suggests that the best time to buy ExxonMobil isn't when the industry is rocking and rolling, but when it is floundering. Sure, oil prices may run higher still, but long-term investors will be better off sitting on the sidelines and waiting for the industry to pull back, and ExxonMobil along with it. This financially strong giant is preparing now for just that scenario.
Be patient
Investors tend to be an excitable group, often taking current trends and extending them way too far into the future. When it comes to the energy sector, which has proven over time that it is highly cyclical, that's a bad call. ExxonMobil is producing stellar results during the current industry upturn, which is great news, but not enough to make it worth buying. It would be much better for investors to put this stock on their wish lists and patiently wait for the next industry downturn when nobody seems to love it anymore.
