Fortunes of oil majors are in general linked to the price of crude. As we enter June, investors are wondering if they should buy Exxon Mobil (NYSE:XOM) stock now. Before you make a decision, it is important to look at the fundamental drivers behind the XOM share price.
So far the global pandemic has adversely impacted near-term demand in oil. As a result we now have an oversupplied market which puts further pressure on commodity prices. Sales and operating revenues have been hit. But costs have remained high, adversely affecting corporate margins. In the summer months, unless we have significant changes in the price of oil, I expect Exxon Mobil stock to trade within a range between $40-$47.50. Therefore investors with a two-to-three-year horizon may consider buying XOM stock around $42.50 or even below. Here’s why.
Oil Price Conundrum
The commodity comes in different grades. And two different prices for crude oil usually get the most attention, specifically the global benchmark Brent crude and the U.S. benchmark West Texas Intermediate (WTI).
At the start of 2020, both were above $60 per barrel. However, by March, they were around $20. At the time, investors realized that the novel coronavirus pandemic would dampen the demand for oil for most of the year.
Moreover, Russia and Saudi Arabia got into a production fight and spooked the markets. Russia said it wouldn’t cut back on production, while Saudi Arabia said it would increase it. Since then, they have both agreed to cut output.
As I write, both Brent and WTI are shy of $35. So oil prices have gone up big since they hit historic lows in April. Meanwhile the price of Exxon Mobil stock has also reflected that volatility.
In January 2020, XOM stock was around $70. On March 23, it hit a 52-week low of $30.11. Now it is hovering around $45.
Demand and supply issues affect the price of oil, which has a crucial impact on the price of Exxon Mobil stock. As states and countries begin to open up further, demand is starting to return.
Yet markets are always forward looking. Therefore, it is likely that the current improved price of oil already reflects this potential increase in demand.
In March, the International Energy Agency (IEA) cut its forecast for global oil demand for the rest of the year. Thus it may be too soon to expect the price to go back to the highs of 2020 around $60. Put another way, Exxon Mobil stock is quite unlikely to go back to $70 any time soon, either.
How Q1 Earnings Came
Exxon Mobil is the largest publicly traded oil company in the U.S. It is also the world’s third-largest after Royal Dutch Shell (NYSE:RDS.B, NYSE:RDS.A) and BP (NYSE:BP).
On May 1, the group reported results for first quarter 2020. The Q1 loss came at $610 million, compared with earnings of $2.4 billion a year earlier. This was the first quarterly earnings loss in more than 30 years.
Revenue was $56.2 billion. In Q1 2019, it had been $63.6 billion, marking a decline of more than 11% YoY. The group reports revenue in three main segments:
- Upstream
- Downstream
- Chemical
In Upstream, management noted that, “Crude prices weakened significantly during the quarter, reflecting an unprecedented combination of oversupply and the impacts of COVID-19 on global demand.” Natural gas prices were also lower compared to the fourth quarter.
Downstream saw weaker industry fuels margins. The decreased demand for jet fuel and gasoline depressed Q1 results.
Capital and exploration expenditures came at $7.1 billion. Management has been taking a range of steps to reduce annual capital spending by 30% and cash operating expenses by 15%.
Despite the current challenges, CEO Darren Woods sounded confident for the future when he said, “The long-term fundamentals that drive our business have not changed.”
Investors should note that Exxon’s quarterly results reflect the global economy realities up to March 31. Therefore Q2 results are not likely to look any prettier.
Is the Dividend Safe?
For decades, energy companies have had a special allure, especially for dividend investors. They knew they could rely on that passive income in the current low-interest environment. And seasoned investors know the importance of dividend re-investing for long-term portfolios.
Exxon’s board has, for now, decided to keep the dividend intact. Thus the juicy dividend yield stands at 7.73%. But could there be a cut if there were another shock in the price of or demand for oil? After all, others, such as Shell and Occidental (NYSE:OXY) have slashed their payouts. For Shell, this would have been an especially painful decision as its board decided to axe the dividend for the first time since World War II. Nervous investors are wondering if BP is next in line, too.
During the analyst call, XOM’s Woods said, “I don’t really look to what Shell is doing to decide our investment policy, frankly.”
The Street notes that a potential dividend cut would put further pressure on Exxon Mobil stock. On the other hand if it can maintain its “Dividend Aristocrat” status, then investors will come back to the stock.
So Should You Buy Exxon Mobil Stock Now?
Exxon Mobil stock is an investment in one of the largest energy producers in the world. Therefore, I am not willing to bet against such an important company in the long run. However, 2020 has so far been a bruising year for the world’s largest oil companies. And investors should be ready to embrace further volatility in the coming months. After all, these are no ordinary times for governments, consumers or businesses.
Are you an investor who pays attention to technical charts? If yes, then you may be interested to know that there may be some pressure on the price of Exxon Mobil stock. While investors would like to see it go and stay over $45, short-term traders are likely to keep it between $40-$45.
And if there is a surprise down move in the price of oil, then XOM stock may even fall below $40. Long-term investors may consider buying the dips.
If you are a current shareholder, you may want to ride the wave. Alternatively, you may consider initiating an ATM covered call position. For example, a July 17-expiry covered call would decrease the volatility in your portfolio, offer some downside protection and also enable you to participate in a potential up move.
Dark clouds are still hovering over the industry. But that may also change fast as global economies start opening up.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil holds covered calls in OXY (May 28 expiry).