ExxonMobil (NYSE:XOM) has been on a roller-coaster ride over the past two years, as investor sentiment for XOM swung drastically, in step with oil prices.
Heading into 2020, oil was rallying and folks were finally heating up to the energy sector after a long bust. Then the pandemic hit and oil prices collapsed, falling below $0 per barrel at one point. It was a stunning reversal. The bottom dropped out of the chemicals and refining markets as well, leaving integrated oil companies in a bad spot.
As the economy reopened, though, sentiment seemed to once again turn on a dime. Oil and gas consumption is surging, and leaders like ExxonMobil are reaping the benefits.
A year ago, analysts were demanding that ExxonMobil slash its dividend. Now, folks are talking about a return to growth in the energy industry. So, where does XOM stock stand amid these rapidly shifting winds?
Soaring Natural Gas Prices a Boon for ExxonMobil
In addition to rising oil prices, ExxonMobil is benefitting from the surge in the price of natural gas.
In December 2009, ExxonMobil announced it would purchase XTO Energy, one of the largest natural gas producers in the United States at the time, in a deal valued at $41 billion. That merger would go down as one of the worst decisions in ExxonMobil’s long history.
The benchmark spot Henry Hub price hit a high of $13 per million British thermal units (MMBtu) in 2008. When ExxonMobil announced its plans to buy XTO, natural gas prices had already fallen to $5 per MMBtu. As the supply glut worsened, natural gas prices continued to slide, breaking below $2 per MMBtu in 2012 and languishing at low levels for years.
Finally, however, the natural gas market has reverted to more normal conditions. The price of the fuel recently crossed $5 per MMBtu, hitting a seven-year high.
This is fantastic news for ExxonMobil. Natural gas prices have been depressed for so long that few analysts were even talking about it as a key source of potential upside for the company. Now, it’s right back in the mix.
Last year, there were numerous calls for ExxonMobil’s management to slash the company’s dividend. Some analysts said the cash flow situation was untenable, particularly given spending on new projects in places such as Guyana.
Indeed, the company posted a $22.4 billion loss in 2020. This was the first annual loss since Exxon and Mobil merged in 1999 to create the largest oil company in the United States.
But management ignored the cacophony and held the line. Seemingly understanding that shareholders were counting on that income stream, they made deep spending and job cuts to preserve the generous dividend. Most oil majors weren’t so resolute and shredded their payouts.
Now, with oil and gas prices booming, ExxonMobil’s earnings and cash flows are once again surging. Analysts see the company earning $4.28 per share this year, which comfortably exceeds its annual dividend of $3.48 per share. Next year, analysts expect ExxonMobil’s earnings to jump to nearly $5 per share. And if oil and natural gas prices continue to rise, that figure could be revised higher.
Long story short, not only is ExxonMobil’s dividend now safe, the company can pay it out while also reducing its debt load or otherwise shoring up the business. After a long lean period, ExxonMobil is set to enjoy a feast in the coming years as the global economy gets rolling once again.
Significant Upside Possible in XOM Stock
The dividend isn’t the only reason to own XOM stock. It’s also one of the most undervalued large-cap stocks out there. Don’t just take my word for it, either. Morningstar’s Allen Good has a $74 price target on ExxonMobil, which represents more than 30% upside from today’s price.
Good’s bullish case on XOM stock is based in part on the company’s balanced approach to dealing with climate concerns. ExxonMobil plans to invest in sustainability initiatives, but primarily to improve efficiency in its core oil and gas operations as opposed to trying to enter the wind or solar power markets, as some of its rivals have done.
Good also commends the firm for cutting costs aggressively and sees the dividend being safe even if oil drops to as low as $50 per barrel once again. This is due in part to the long-awaited new production from Guyana having a low cost-per-barrel basis. This will give the company a great deal of flexibility in managing its overall cost profile and cash flow generation.
XOM Stock Verdict
I’ve been bullish on XOM stock specifically and the energy market in general for quite a while. The Covid-19 bust was a shock to energy investors. However, companies with strong management teams and solid balance sheets — such as ExxonMobil — were able to ride it out.
Management understood the importance of its dividend to shareholders and fought to preserve it. Now, the company is set to prosper as oil and gas prices soar and retail investors come back to the sector.
The new energy bull market is underway, but we remain in the early innings. Things are looking up for ExxonMobil, and XOM stock is attractive whether you’re interested in it for its dividend or capital appreciation.
On the date of publication, Ian Bezek held a long position in XOM stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.