What happened
Shares of ExxonMobil (XOM 0.23%) were falling on Monday, down 3% as of 2:18 p.m. ET.
There seem to be two pieces of news moving the oil and gas giant today. First, Exxon saw its stock downgraded by a Wall Street analyst who seems to think the stock's impressive multiyear run may be running into resistance. Second, China surprised investors with lower-than-expected manufacturing data released yesterday, adding to oil-demand concerns.
So what
On Sunday, China released its April manufacturing purchasing managers index (PMI), which surprised to the downside. The April figure came in at 49.2, signaling a contraction and decline from 51.9 in March. China's growth had surprised to the upside in the first quarter, but it appears its reemergence from coronavirus lockdowns may be more uneven than hoped.
China is the world's second-largest economy and seen as a key driver for oil demand. So it wasn't a surprise to see oil prices falling today, dropping between 1% to 2% to between $75 and $76 per barrel. It's no surprise that many oil stocks were down a bit in response.
In addition, Exxon also received a downgrade today from Goldman Sachs analyst Neil Mehta, who lowered his rating on Exxon from "buy" to "neutral," while giving the diversified major a $125 price target. That compares with a $115 stock price today.
Mehta has been bullish on the stock for two and a half years now during which time Exxon appreciated 170% since late 2020. Exxon has executed relatively well as it has been able to rationalize its spending over that period while also striking prolific new sources of oil, especially off the coast of Guyana. However, Mehta now also believes "[T]he valuation of ExxonMobil now appears to better reflect the structural turnaround in the business, with shares trading at a 7% free cash flow yield on 2024 estimates at $85/bbl Brent."
Of note, the stock is just off its all-time high of $119.92.
Image source: Getty Images.
Now what
The oil and gas industry can be quite volatile, especially as fears of a supply shortage run into the countervailing fear of a global economic slowdown or recession. However, oil and gas companies should probably occupy a portion of investor portfolios. They generally trade at low multiples, pay out ample dividends and repurchases, and can be a hedge against supply shocks like we saw in 2022.
Exxon specifically is one of the more defensive names in the space due to its diversification across upstream, midstream, and downstream operations. However, that usually means Exxon trades at a higher multiple than some of its peers. With the stock having run a long ways in a short amount of time, it's no surprise to see some analysts downshifting future expectations.
