The energy sector has been doing incredibly well in recent years.
exxon mobil (XOM 1.15%) The oil major hit an intraday high of $123.75 per share on April 12th. The oil majors have since pulled back a bit, but Exxon is still up significantly since the start of the year, more than doubling over the past three years.
Exxon’s market capitalization now stands at $474 billion, moving it closer to becoming the first $5 trillion energy stock. Here’s why investors love Exxon, and why there’s room for more upside in the bull market.
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new theme
Up more than 12% year-to-date, energy is now the world’s best-performing sector. S&P500. And while you might think tech stocks and the more growth-oriented parts of the market are the leaders, tech stocks have actually lagged behind energy, communications, industrials and financials so far this year. .
^SPX data by YCharts
Given that energy accounts for only 4% of the S&P 500 index, it is difficult for this sector to lead the market alone. But energy is part of a broader theme in which earnings growth is driving the more value-oriented parts of the market.
Resistant to high interest rates
Oil and gas prices fluctuate based on supply and demand. Despite high inflation and rising interest rates over the past few years, demand remains strong, making oil a cause of inflation rather than a victim. This feature is especially important because the Fed has not yet begun cutting rates and some economists expect fewer rate cuts in 2024 than initially expected given the positive inflation data.
Over the past few years, Exxon has used large amounts of its profits to pay down debt, helping to reduce interest payments even as interest rates have risen.
XOM Long Term Net Debt (Quarterly) Data by YCharts
Exxon was able to finance its operations, capital expenditures, dividends, and stock buybacks from business profits, rather than by borrowing money or depleting cash on its balance sheet. In summary, Exxon has been able to withstand rising interest rates because it continues to pay down debt, has not taken on new debt, and because it does not rely on debt to operate its business (at least (when oil prices are relatively high as they are now). today).
In comparison, many companies investing heavily in renewable energy are currently unprofitable due to the industry-wide downturn.
The point here is that oil and gas companies like ExxonMobil have many ways to scrape together cash, enjoy impeccable financial health, and reward investors, even as interest rates remain high. This means that they are attractive to investors because they can do well even when they are not. For longer than expected. By comparison, companies with debt or high interest payments are more vulnerable to interest rate risk.
Over the long term, Exxon is leveraging reinvestment in its operations, low-carbon initiatives, and acquisitions. In contrast, the short-term drivers are stock buybacks and dividends, which are significant as Exxon has increased its dividend by 9.2% and reduced its share count by 6.3% over the past five years.
Exxon’s path to the 5 trillion yen level
For Exxon, the question seems to be not if its market capitalization will reach 5 trillion yen, but when. We’ll learn more about Exxon’s performance so far this year when it reports its first quarter results on April 26th. Exxon is poised for another great year.
The Energy Information Administration said in its April short-term energy outlook that it expects 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, and Exxon needs to be able to justify increased spending and acquisitions. pioneer natural resources –The $59.5 billion transaction is expected to close in the second quarter of 2024.
The easiest way to increase Exxon’s market value is through increased profits. With a strong balance sheet, Exxon can leverage its massive profits to improve its investment thesis, including accelerating growth, increasing dividends, and increasing share buybacks. Exxon’s 3.2% dividend yield is already attractive, but the dividend yield is a step lower than it has been in recent years, simply because Exxon’s stock price is outpacing its dividend growth rate.
Another notable factor is Exxon’s investment in low-carbon initiatives. The company has been aggressively investing in carbon capture and storage, including completing its $4.9 billion acquisition of Denbury last November. Exxon’s fast-growing low-carbon solutions business is a great way for the company to diversify its revenue and hedge against the slow decline in oil demand and the energy transition. But Exxon has made it clear that it’s not just investing in low carbon for the sake of positive press, it’s doing it to make money.
In its business plan released in December, Exxon said it expected to generate a 15% return on investments in lithium, hydrogen, biofuels and carbon capture and storage. Exxon has set several emissions reduction goals by 2030, with an ultimate goal of net-zero emissions by 2050. The ability to take risks and secure the funds needed to make low-carbon investments without compromising core business performance is a major advantage.
Exon is a reliable choice
Oil prices are notoriously difficult to predict, and if oil prices were to fall for unforeseen reasons, it could weigh on Exxon’s earnings and put pressure on its stock price. Either way, Exxon has the portfolio and foundation to create value for patient shareholders.
Investors looking for a high-quality company with a high dividend payout without being overvalued could consider Exxon and its 13.4x price-to-earnings ratio as a balanced buy now.
