Exxon Mobil Corp. (XOM) engages in the exploration, development, and distribution of oil, gas, and petroleum products. It operates through the following segments: Upstream, Downstream, and Chemical. The Upstream segment produces crude oil and natural gas, Downstream manufactures and trades petroleum products, and the Chemical segment offers petrochemicals.
Compared to other oil stocks, shares of Exxon Mobil have performed very well in 2021, with a yearly gain of over 50% (including dividends).
Dividend stocks such as XOM stock offer income generation and increase total returns, especially in times of significant price appreciation, which has occurred for this oil giant in 2021.
I am neutral on XOM stock. I see a lot of value in the turnaround within the first nine months of the soon-to-end year 2021, but critical risks are hard to ignore.
Exxon Mobil: The Good News
The Q3 2021 earnings report was strong. All three of Exxon’s core businesses generated positive earnings, supporting the financial recovery in 2021 compared to a bad Fiscal Year 2020 due to the pandemic crisis.
In Q3 2021, Exxon generated revenue of S73.8 billion, up 9.6% quarter-over-quarter, net income of $6.75 billion, up 43.9% quarter-over-quarter, and EPS (diluted) of $1.58, up 43.9% compared to $1.1 in Q2 2021. This is a significant improvement from the EPS of -$0.16 in Q3 2020.
The firm announced that in the fourth quarter, the dividend would increase to $0.88 per share, up 1.1% compared to the previous quarterly dividend of $0.87. Starting in 2022, there will be a share repurchase program of up to $10 billion over 12-24 months.
Free cash flow reported of $9.25 billion was sufficient to cover the dividend payment of $3.72 billion.
Exxon Mobil will apply a corporate plan of maintaining disciplined capital investments constant at $20-$25 billion per year and is already on track to achieve 2025 emission-reduction plans by this year-end.
Within the next years up to 2027, there are plans to pursue investments in high-return advantaged projects and focus on greenhouse gas emission reductions to address climate change.
The turnaround achieved in the first nine months of 2021 for Exxon Mobil is remarkable. Net earnings of $14.17 billion have been achieved, compared to -$2.37 billion for the first nine months of 2020.
After a $22.44 billion net loss in 2020, Exxon is set to return to profitability in 2021. Debt reduction is a positive factor that is strengthening the balance sheet.
Not all key metrics are supportive, though now. I am concerned about three risks.
Exxon Mobil: Three Risks to Monitor
While the current debt-to-equity ratio may not seem excessive, XOM’s cash-to-debt ratio of 0.08 is too low and poses severe liquidity issues.
Next, Exxon Mobil has a 10-year revenue CAGR of -6.2%, which is obviously not ideal.
Finally, Exxon Mobil has a weak trend in terms of efficiency as inventory turnover, fixed assets turnover, and asset turnover had all declined in 2019 before the pandemic. I would like to see the efficiency gain momentum when 2021 is completed.
The Omicron variant and uncertain oil prices have diverged opinions between OPEC and the IEA (International Energy Agency).
OPEC remains confident that oil demand will continue to be strong and recover from the pandemic lows, as at one time crude oil futures turned negative. On the other hand, the IEA believes Omicron will harm global oil demand. In the EU, the Netherlands announced a lockdown to fight the pandemic. Other countries may follow. That would be bad news for oil prices and Exxon Mobil.
Wall Street’s Take
Turning to Wall Street, Exxon Mobil has a Hold consensus rating based on six Buys, six Holds, and three Sell ratings assigned in the past three months. The average Exxon Mobil price target of $72.33 represents a 23.5% upside potential.
Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates Read full disclaimer >
