The most valuable energy stock traded on the U.S. exchanges, ExxonMobil (XOM -2.78%), has a $392.2 billion market cap -- well ahead of second-place Chevron (CVX 0.37%) with its $268.3 billion market cap. There's a lot to like about both of these companies, but given the lead ExxonMobil has, I'm going to focus on why it deserves to be worth $500 billion today, and why it could reach a $1 trillion valuation within the next four years.
We'll also discuss the strength of ExxonMobil's dividend, which at current share prices yields 3.9%. Here's why the dividend stock is worth buying now.
Image source: Getty Images.
Full circle
In 2007, ExxonMobil was the most valuable company by far in the S&P 500. Profits were soaring, the company had way more cash on the balance sheet than debt, and big oil just seemed to keep getting bigger.
XOM Net Income (TTM) data by YCharts.
As you can see from the chart, ExxonMobil's profits briefly eclipsed the high from 15 years ago, but have since come down. A lot of that spike was due to the surge in oil prices that resulted from Russia's invasion of Ukraine.
ExxonMobil's balance sheet was levered up during the worst of the pandemic. It has since gotten much healthier. But if we compare the energy company today to where it was in 2007, profits are still lower, and the balance sheet, although amazing, can't compete with its massive cash hoard from the late 2000s.
You may be wondering why ExxonMobil deserves to be worth more today than it was 15 years ago. The answer has to do with where it could be headed.
Measured growth
From 2007 to 2021, ExxonMobil's net debt steadily grew as the company expanded even through downturns and recessions, and faced the looming threats of climate change and the clean energy transition.
But today, it is generating more "secure" profits. In early December, it published a press release detailing its plan to add about $14 billion to its annual earnings and cash flow potential over the next four years.
ExxonMobil has yet to unlock the full potential of its Guyana investment. The reservoirs's development could lower the company's overall energy production costs while boosting cash flows. In the meantime, its pending acquisition of Pioneer Natural Resources will give it a dominant position in the Permian Basin and should contribute to returns in both the short term and the long term.
The long play
The difference between ExxonMobil in the late 2000s and today is that today, it's actively investing in lower-emission opportunities. It has already ended routine flaring in the Permian Basin. It is also tracking its progress toward a goal of reaching net-zero emissions by 2050. Its latest plan includes $20 billion in lower-emission opportunities, $20 billion per year in stock buybacks through at least 2025 once the Pioneer deal closes, and plans for ongoing dividend hikes. Its plans are based on a conservative oil price target of just $60 per barrel of Brent crude. Put another way, ExxonMobil won't need high oil prices to hit its current targets and invest in long-term growth from lower-emission sources.
Over the last 10 years, Brent crude has averaged far above $60 a barrel.
Brent Crude Oil Spot Price data by YCharts
It has dipped below $40 during downturns. But should another such period occur, ExxonMobil could simply suspend its share buybacks and pull back temporarily on long-term investments -- or, if conditions get really bad, rely on its solid balance sheet. In sum, building a plan around $60 Brent is completely reasonable, and the returns ExxonMobil is promising are excellent.
It gets even better. ExxonMobil expects that 90% of its planned upstream capital investments in new oil and natural gas production over the next few years will be able to generate returns greater than 10% even if Brent is just $35 a barrel.
All told, the energy company is becoming more efficient and better prepared to succeed in a low to mediocre oil price environment.
Consolidation could lead to overall market stability
Another factor working in ExxonMobil's favor -- and to the benefit of the petroleum industry overall -- is consolidation. There has been a slew of merger and acquisition activity in the oil and natural gas space. If companies are reasonable (which remains to be seen), then the industry should be more stable. The balance sheets of many oil and gas companies are solid right now. As long as they don't overspend, the industry should be better equipped to handle volatility and manage through periods of lower prices.
If the industry does manage the next downturn better than it has previous ones -- and that's a big "if" -- then it could lay the groundwork for multiple expansions across the industry.
The path to $1 trillion
Profit growth paired with valuation expansion is how ExxonMobil could get to a $1 trillion market cap within the next four years.
It currently is valued at around a $400 billion market cap. Profit growth of $14 billion by 2027 should put ExxonMobil's 2027 net income in the ballpark of $65 billion to $70 billion, based on its 2022 net income of $55.7 billion. Let's assume $65 billion.
At a mere 16 price-to-earnings multiple -- the historic median for the company -- and assuming no buybacks and $65 billion in net income, ExxonMobil would have a $1.04 trillion market cap. ExxonMobil's current price-to-earnings ratio is 9.7, So if ExxonMobil were valued at its historic median, $1 trillion isn't out of the picture.
Any number of things could hinder the company's growth, of course. Its Guyana assets could develop worse than expected. Oil prices could crash. ExxonMobil could mismanage the integration of Pioneer. A slew of unforeseen events could impact its business. Also, the market will need to cooperate a little with a higher valuation multiple than today. But overall, ExxonMobil stands a reasonable chance of more than doubling in value over the next four years -- giving it an attractive risk/reward balance.
Get paid to wait
The icing on the cake is ExxonMobil's dividend, which it boosted for the 41st consecutive year in October. The reliability of the payout, paired with its affordability, makes it one of the highest-quality dividends in the oil patch. Its yield of 3.9% is excellent as well (particularly given the importance of the "4% rule" in retirement planning). In sum, ExxonMobil's dividend provides a sizable incentive to simply hold onto the stock even through periods of volatility.
The logical way to play the energy sector
If you're interested in investing in the energy sector, chances are, you're willing to endure its ebbs and flows, and expect to collect a dividend along the way. ExxonMobil gives investors geographic diversification and diversification across the oil and natural gas value chain.
It pays a sizable dividend and has a long track record of not cutting its payout even when times are bad. Management also plans to grow shareholder value through share buybacks and organic growth.
Add it all up, and it wouldn't surprise me one bit if ExxonMobil were worth over $1 trillion by the end of 2027.
