ExxonMobil (XOM -0.21%) reached an intraday all-time high of $123.75 per share on April 12. The oil major has pulled back a little since then, but Exxon is still up big on the year and has more than doubled over the last three years.
Exxon's market capitalization currently sits at $474 billion as it approaches the feat of becoming the first half-trillion-dollar energy stock. Here's why Exxon is in favor with investors, and why the rally has more room to run.
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An emerging theme
Up over 12% year to date, energy is currently the best-performing sector in the S&P 500. And while you may think that tech stocks and the more growth-oriented parts of the market are the leaders, tech is actually lagging behind energy, communications, industrials, and financials so far this year.
Given that energy makes up just 4% of the S&P 500, it's difficult for the sector to lead the market on its own. But energy is part of the broader theme that earnings growth is driving the more value-oriented parts of the market.
Resilient to high interest rates
Oil and gas prices fluctuate based on supply and demand. Despite high inflation and rising interest rates over the last few years, demand has been strong, which has made oil a cause of inflation -- not a victim. This characteristic is especially important since the Fed has yet to begin cutting rates, and hot inflation data is leading some economists to expect fewer rate cuts in 2024 than initially projected.
Over the last few years, Exxon has used its outsized gains to pay down debt, which helped reduce its interest expense even as interest rates rose.
XOM Net Total Long Term Debt (Quarterly) data by YCharts
Exxon has been able to fund its operations, capital expenditures, dividends, and buybacks from the gains of the business, not by taking on debt or depleting the balance sheet of cash. In sum, Exxon has been resilient to higher interest rates because it has been paying down debt and not taking on new debt, and because it doesn't depend on debt to run its business (at least when oil prices are relatively high like they are today).
By comparison, many companies investing heavily in renewable energy aren't profitable right now due to an industry-wide downturn.
The key takeaway here is that an oil and gas company like ExxonMobil is attractive to investors because it is raking in the cash, enjoys impeccable financial health, has a variety of ways it can reward investors, and can do well even if interest rates stay high for longer than expected. By comparison, companies that are taking on debt or have high interest expenses are more vulnerable to interest rate risk.
The long-term levers Exxon is pulling are reinvesting in the business, low-carbon initiatives, and making acquisitions. In contrast, the shorter-term levers are buybacks and dividends -- which have been substantial, as Exxon has increased its dividend by 9.2% and reduced its share count by 6.3% over the last five years.
Exxon's path to the half-trillion mark
For Exxon, it looks like it's a matter of when, not if, it will hit a half-trillion market value. We'll learn more about Exxon's results so far this year when it reports Q1 earnings on April 26. The stage is set for Exxon to have another great year.
In its April short-term energy outlook, the Energy Information Administration said it forecasts Brent crude oil prices to average $89 in 2024, including $90 in the second half of this year. This is a great setup for Exxon, which needs to be able to justify increased spending, as well as its acquisition of Pioneer Natural Resources -- a $59.5 billion deal it expects to close in Q2 2024.
The simplest way for Exxon's market value to go up is for earnings to grow. With the balance sheet in good order, Exxon can use outsized profits to improve the investment thesis, whether that's with accelerated growth, a higher dividend, or more buybacks. Exxon's 3.2% dividend yield is already attractive, but it is a step below where the yield has been in recent years simply because Exxon's stock price has outpaced the growth rate in its dividend.
Another factor to watch is Exxon's investments in low-carbon efforts. It has been aggressively investing in carbon capture and storage, including the completion of its $4.9 billion acquisition of Denbury in November of last year. Exxon's rapidly growing Low Carbon Solutions business is a great way for the company to diversify its earnings and hedge against a gradual decline in oil demand and the energy transition. However, Exxon has made it clear it isn't just investing in low carbon for the favorable press -- it is doing so to make money.
In its Corporate Plan, published last December, Exxon said it expects to generate 15% returns on lithium, hydrogen, biofuels, and carbon capture and storage investments. Exxon has several emissions reductions targets for 2030, as well as an ultimate goal of being net-zero by 2050. It's a significant advantage to have the cash needed to take risks and invest in low-carbon without jeopardizing the performance of the core business.
Exxon is a reliable choice
Oil prices are notoriously hard to predict, so if they come down for an unforeseen reason, Exxon's earnings will be under pressure, which could weigh down the stock. Regardless, Exxon has the portfolio and fundamentals to create value for patient shareholders.
Investors looking for quality, dividend-paying companies that aren't overpriced could consider Exxon and its 13.4 price-to-earnings ratio as a balanced buy now.
