Oil prices that slumped over the warm winter are climbing back toward their highs of last summer, with West Texas Intermediate crude prices north of $85 a barrel -- and potentially heading higher as conflicts continue to roil the Middle East. What's the best way to play this trend of rising oil prices?
Don't overthink it. Sometimes the obvious answer is the right one: Buy ExxonMobil (XOM 1.42%) stock, urges UBS analyst Josh Silverstein because this stock is going to $150 in a hurry.
Is ExxonMobil stock a buy?
In a note published on TheFly.com Thursday, Silverstein argued that Exxon's breadth of coverage across upstream and downstream oil operations positions it well to capitalize on rising oil prices, and the company's recent $60 billion deal to acquire Pioneer Natural Resources will add to this strength.
He may be right. Oil is a notoriously volatile commodity (just over the last five years, we've seen prices swing from negative numbers during the pandemic, to as high as $120 a barrel in the immediate aftermath of Russia's invasion of Ukraine). Still, the long-term trend in prices does incline to the upside, rising about 33% over the last five years, and Exxon has capitalized on rising prices, earning more than $36 billion on sales of $338.3 billion last year for example.
Still, I'm not as bullish on Exxon today as I was a couple of years ago. Why not? After a brief aberration, Exxon has resumed its long-term pattern of generating weaker free cash flow than it reports as net income -- and even its net income doesn't imply a particularly cheap stock price. At nearly 14 times earnings, and earnings expected to grow less than 10% total over the next three years, Exxon's not much of a growth stock. While the business remains strong, and the 3.1% dividend yield is decent, it won't be enough to attract investors who can easily earn 4% or even 5% in a bank savings account today.
Silverstein's prediction of nearly 25% stock price gain in one year feels like wishful thinking to me.
