ExxonMobil's (XOM -0.81%) stock has increased over 200% since the ides of March 2020 (day 15 of that month, for those not into Roman history). That's vastly better than any of its closest integrated energy peers.
Given that huge run, investors looking at Exxon should step back and think about why they are buying this oil giant before they pull the trigger. Here's why it could be a good choice or a bad one.
Ready for what comes
On the positive side of the equation, Exxon is built to survive. That's important because the energy industry is notoriously volatile, frequently experiencing large and swift upturns and downturns.
For example, while the 2020 energy downturn, precipitated by the economic closures used to slow the spread of the coronavirus, was shocking, it was not out of character for the energy sector. And Exxon muddled through it just fine, notably extending its annual string of dividend increases, which is now up to 41 years (and counting). Clearly, it is a survivor.
An important piece of that story is the fact that Exxon has a diversified business. It spans the entire industry, from the upstream (oil and gas drilling) through the midstream (pipelines and storage) and into the downstream (chemicals and refining).
Energy prices are the main determinant of financial results, but the other businesses help to soften the blow of industry downturns. For example, lower oil prices reduce input costs for chemicals and refining operations. It also has one of the strongest balance sheets in the industry, allowing it to take on debt during downturns so it can continue to support both its business and shareholder dividends.
XOM Debt to Equity Ratio data by YCharts
If you are looking to add an energy stock to your portfolio, perhaps for diversification purposes, Exxon would be a solid long-term option.
It is not cheap
The problem here is that Exxon is not a particularly cheap stock today. The impressive outperformance compared to close peers highlights this fact. But so does the dividend yield, which at roughly 3%, is at best middle of the road, historically speaking. Looking at price to tangible book value, another metric used in the energy space, suggests Exxon is trading on the cheap side. However, the roughly 2.4 times price to tangible book value is just slightly below the 2.7 average. And the gap between the two figures has narrowed greatly since the start of 2022 when Exxon's price to tangible book value was closer to one. Investors are probably paying full price, or near to it, for Exxon today.
XOM Dividend Yield data by YCharts
Paying full fare for a well-run company isn't a terrible thing, but you need to go in knowing that Exxon's impressive earnings performance of late (attributable to the massive energy rebound following the 2020 downturn) isn't likely to last. That's because oil prices hit a peak in 2022 and have since been trending lower. That said, Exxon has material developments with low costs, which helps support profitability, but the trend in oil prices is likely to have the biggest impact on the top and bottom lines.
If you are buying Exxon's stock because you expect it to keep rising, you pretty much need to believe that oil prices will suddenly take off again. That's entirely possible but virtually impossible to predict. The shares could also benefit from the company continuing to lower its production costs, but that is usually a difficult task and can only go just so far before petering out.
What's notable, though, is that Exxon's stock price has continued to rise even though oil prices have started to pull back. In fact, it seems like Exxon's stock started to materially diverge from its peers just when oil prices began to fall. That's a disconnect that should cause investors some concern. While you could attribute that divergence to Exxon's operational success in lowering costs, it increases the risk of a misstep and the potential pain if, perhaps when, the gap narrows.
As a core holding, Exxon probably makes a lot of sense, given its history of resilience. As a way to play oil price moves, well, it looks like there may be more risk than reward baked into the stock price right now.
Good for some investors, but not all
Exxon is basically a solid option for long-term investors looking to add a robust energy company to their portfolio. The business' proven ability to navigate through good and bad times is impressive. But, given the stock price run and the disconnect between the stock price (up) and oil prices (down), it may not be the best option for those trying to play energy price moves.
