Exxon Mobil (NYSE:XOM), one of the world’s biggest oil & production companies, has outperformed the market in the past few quarters. XOM stock advanced robustly year-to-date, up 27% to $78.98 per share as of Wednesday’s open. The company has benefitted from supply limitations in the Organization of the Petroleum Exporting Countries (OPEC), triggering an oil rebound.
This rally has propelled the oil sector, measured by the United States Oil Fund LP (NYSE:USO), up 20% year-to-date to $65.37 per share.
So investors who have not yet jumped in might wonder, is there still time to catch this train? Or is it best to stay on the side?
The Oil Market Stays Buoyant
Oil markets have significantly tightened in the past few years. The West Texas Intermediate (WTI) benchmark has reached a seven-year high of $95.82 per barrel. The firmness of the oil market is not expected to ease at least until March, when the next OPEC reunion is scheduled.
Besides, the International Energy Agency indicated in a February 2022 report that the global oil supply-demand balance established in a deficit in January. Spare output in OPEC countries, production constraints in non-OPEC oil-producing countries, and rising market concerns about renewed supply disruptions, mainly related to the geopolitical tensions regarding Ukraine are sustaining oil markets.
These developments, along with the November announcement by the U.S. Administration that it will release 50 million barrels of oil from the Strategic Petroleum Reserve to lower oil prices, have marginally alleviated oil market pressures. According to the IEA, oil inventories in the Organization for Economic Co-operation and Development (OECD) countries are lingering at their lowest level in seven years, providing support to oil futures.
The constructive oil market backdrop should thus continue to provide upward pressure for XOM shares, especially since the IEA expects a yearly oil supply growth in the U.S. of 1.2 million barrels per day for 2022, which will predominantly originate from Exxon.
XOM Stock Has Resilient Fundamental Picture
In the last four quarters, XOM stock has broken analysts’ earnings per share (EPS) and revenue estimates. Last quarter, the company reported fourth-quarter revenue of $84.97 billion, up 82.56% year-on-year and beat by 9 cents per share the quarterly EPS estimates of $1.96. These favorable figures, have significantly benefitted the oil and gas company and mostly explain the outperformance of the stock.
Going forward, XOM’s revenues are expected to advance moderately, up 7.4% in 2022 to $306.6 billion. That’s down from last year’s fast-paced growth of 57.4% year-on-year. If it continues on this favorable trend, it will surpass pre-Covid-19 net sales, generating additional tailwinds for its share price.
On the other hand, Exxon’s bottom line is expected to improve significantly this year, up 24.4% YOY to $28.6 billion. That represents an increase of nearly 40% compared to the net income in 2018. XOM’s net margin is forecasted to reach 9.34% this year, compared to 8.15% in 2021 and 7.18% in 2018.
In addition, the company is expected to increase its 2022 capital expenditures by nearly 35% at the midpoint of the $21 billion-$24 billion range. It’s allocating that money to low-carbon projects. Similarly, the company took advantage of high oil prices to pay down nearly $20 billion in debt in 2021. Experts expect it to further reduce debt this year, down 23.3% year-on-year to $35.9 billion.
Undervalued Valuation Multiples Make Exxon a Buy
Despite the recent appreciation of XOM stock, there is still room to grow. Exxon Mobil is currently trading at cheap multiples, with a 2022 estimated P/E of 11.8x and estimated EV/EBITDA of only 5.73x.
One of XOM’s major U.S. peers, Chevron Corporation (NYSE:CVX) is currently exchanging at a slight premium, with an estimated 2022 P/E of 12.3x and EV/EBITDA of 5.8x.
Shell (NYSE:SHEL), a major Anglo-Dutch oil and gas company engaged in both conventional and unconventional oil and gas fields is slightly cheaper than its U.S. equivalents, with a P/E ratio of 8.2x in 2022 and an EV/EBITDA of 3.95x.
Furthermore, the consensus of analysts foresees more potential in XOM shares, in spite of Exxon’s sharp rally in the past quarters. Then there’s the 18 analysts following the oil company. Half have a bullish view, whereas the rest are recommending to hold the oil and gas major. Meanwhile, the average target price in the next 12 months stands at $84 per share, corresponding to an upside of 7% from today’s price.
In this context, I am bullish on XOM in the next six months. I think the company will continue to outperform the broader market in these volatile equity conditions. The reasonable valuation metrics, the strengthening of Exxon’s balance sheet and the favorable oil market cycle will enable the company to maintain a high profitability level and deliver value to its shareholders.
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