5 Things to Think About Before Buying Exxon Stock

Dividend Stocks

For investors in Exxon Mobil (NYSE:XOM), the last year has been a very interesting ride. Even more so, when you pull up at a chart for Exxon stock and see that we are basically right were shares started the year off. That’s enough to drive investors batty, especially when oil prices have cruised passed $70 per barrel and many of its energy stock peers have surged in recent weeks.

Exxon is one of the largest energy stocks on the planet with a massive resource base and billions in cash flows, so XOM should be flying high as well.

However, despite being the king energy stock, Exxon isn’t without its warts. There are still some issues with the former Standard Oil. And those issues have kept a tight lid on shares. The question for investors now is whether or not, Exxon is truly getting over those humps and is back to being the leader in the oil patch.

With that, here are three pros and two cons for Exxon stock.

Pros for Exxon Stock

Rising Oil Prices

As we’ve said time and time again, when your chief business is harvesting a commodity, the higher the price for that natural resource, the more money you’ll make. It really is as simple as that. Oil prices have continued to rise as the strengthening global economy has boosted demand, while supplies remain in check. And those supplies continue to feel the pinch even further.

Sanctions have started to hit major oil producer Iran hard and Hurricane Michael has managed to knock around a fifth of the Gulf of Mexico’s production offline. As a result, global benchmark Brent is now at roughly $85 per barrel, while U.S. benchmark West Texas Intermediate is at roughly $75 per barrel.

This is great news for Exxon. While the firm is still mostly tied to natural gas production, oil still makes a huge part of its overall pie and its oil piece has been growing. Already we’ve seen the firm benefit from higher oil prices. Last quarter, year-over-year Exxon Mobil revenues surged nearly 17% to reach $68.21 billion.

With oil prices higher now then what they were a few months ago, XOM should be able to see higher revenues, cash flows and profits from its operations.

Opportunities for Growth

Exxon isn’t just resting on its laurels. It’s growing its portfolio of assets. XOM has plans to increase its capital spending from around $24 billion this year to over $30 billion by 2023. Much of that money will continue to go to high margined areas like the Permian Basin.

However, a huge slug of that spending will go to several new elephant finds. This includes new offshore fields in Guyana, additional acreage in Brazil and LNG opportunities in Mozambique. When these fields begin seriously producing- XOM has a timeline of around five years for its offshore operations in Guyana– they should help push its overall cash flows skyward.

Even better is that the company will be done spending the extra CAPEX needed to make these assets get started. That’ll leave plenty of more cash flows available for shareholder rewards.

Bargain Price & Yield

 No one would confuse Exxon with a growth stock on the NASDAQ. But as a steady-eddy dividend play, it can’t be beaten. The best part is the round trip in XOM stock year-to-date has allowed investors to buy it as a big-time bargain. Right now, XOM stock can be had for a P/E of 17- that’s roughly in-line with the S&P 500.

But when looking at the Energy Select Sector SPDR Fund (NYSEArca:XLE), which tracks the energy stocks in the broader benchmark, Exxon is about two full basis points cheaper. Moreover, it yields much higher as well. Currently, Exxon is paying a steadily growing 3.81% dividend yield.

Given its potential for growth and increased earnings due to rising oil prices, Exxon stock could be priced for perfection. Compared to its peers, there’s a lot to like and investors are getting that for a sector high dividend and low valuation.

Cons for Exxon Stock

Falling Behind Rivals

One of the reasons why Exxon needs to spend some big bucks today is that its production has been dropping for years. Moreover, it’s production of oil seems to be falling the fastest.

This was a problem even before the oil rout. XOM clamped down hard on spending during the last few lean years and cut exploratory spending a bunch. The problem is, now that oil is surging, Exxon is playing catch up with rivals like ConocoPhillips (NYSE:COP) or Chevron (NYSE:CVX).

While this may not matter over the next decade, in the short term its caused XOM stock to drag behind the broader energy sector.

Given its rivals head starts, XOM has a big hill to climb. A hill made even bigger because of Exxon’s massive size. It takes some very big numbers to actually impact production at the giant.

That Dividend Isn’t That Great

As we said, Exxon dividend is great. But it may not be the greatest, especially when compared to the dividend growth of many rivals. Several other energy stocks have begun to reward shareholders in a much more meaningful way.

Domestically-focused producers like EOG Resources (NYSE:EOG) have been able to take advantage of the Republican tax plan and higher oil prices to boost margins really high. EOG has grown its dividend by nearly 19% with its last announcement. COP has had similar dividend growth in recent payouts.

There’s plenty of academic research that suggests that dividend growth rather than a high yield produces better returns. So while Exxon’s dividend is a major reason to buy the stock, others are growing their payouts at much faster rates.

The Bottom Line on Exxon Stock

The decision to buy or sell XOM stock is an interesting one. The one hand, XOM seems to be getting over its concerns about falling production and it is trading for peanuts. However, rivals have been making plenty of moves and are doing it better.

For XOM, the buy/sell answer may come down to your timeline. Truth be told, it’s going to take a while for Exxon to reap the benefits of its CAPEX spending and new assets. At least you’re paid a nice dividend while you wait.

If you’re looking for a better return in the short run, bypassing XOM stock for faster-moving rivals like EOG or COP might be the better bet. However, you’ll pay a premium for these stocks over XOM’s bargain price.

All in all, XOM is a bargain at today’s price. It just may take a few years of underperformance to realize that bargain.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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