Since crude oil prices peaked two years ago, Exxon Mobil’s EXXON MOBIL CORPORATION
market value has shrunk by about 20%. Sounds bad, but that’s only half the losses suffered by the average oil stock.
And while shares of the energy giant have been flat over the past year, they have outperformed the broad market and trounced their peers, which are still down by double digits despite the rebound in oil that began in late January.
Sure, the company has felt some pain; its profits were cut in half in 2015. But in this tumultuous market, Exxon Mobil has been a surprising stalwart. The question is, How strong is the case for owning the stock going forward, especially if this bounce back in oil prices is for real?
Hedging Its Bets
Unlike some of its peers — such as ConocoPhillips CONOCOPHILLIPS INC.
, which spun off its refining business a few years ago — Exxon stuck with a diverse approach even when times were flush and oil hit $148 a barrel in 2008.
That’s paying off now, as Exxon’s refining operations, which benefit from low oil prices, doubled earnings last year. That has helped cushion the drop in oil production revenues, which have been hurt by cheap crude.
Why does this matter?
Because another oil boom may be years away owing to China’s economic slowdown and the refusal of most global producers to cut supplies. Denton Cinquegrana, chief oil analyst at the Oil Price Information Service, expects prices, now near $40, to slowly crawl back next year, to just $50 or $60.
Income Growth Now
The energy giant has raised its dividend payments for 33 straight years and has not cut shareholder payouts since 1948. And there are few signs this oil crisis threatens those streaks. Last year Exxon paid out $2.88 per share, for about a 6% increase. That’s slightly slower than its average hike over the past five years, but far better than rival Chevron’s CHEVRON CORP.
flat payouts and ConocoPhillips’s recent cut.
Moreover, Exxon’s payout ratio — the percentage of earnings passed along as dividends — was about 75% last year, vs. 175% for Chevron, a sign the company isn’t overextended.
If Exxon continues cutting costs and oil prices recover moderately, stock buybacks and dividend growth should see a boost in 2017, according to Wells Fargo analysts.
Earnings Growth Later
Exxon hasn’t been unscathed. The firm is slashing capital spending 25% this year after last year’s profit slide.
Still, Exxon has something no competitor has: a triple-A credit rating, which gives it the financial strength to buy assets on the cheap when smaller oil producers fold. That plus Exxon’s business mix should let the company’s earnings rebound faster than those of its peers.
“Exxon continues to represent the most defensive play in the sector, although that is largely reflected in the current share price,” says Morningstar analyst Allen Good.
With the profit dip, the stock’s price/earnings ratio jumped above 30. But Exxon and Chevron trade at 20 times 2017 forecasts, and Exxon’s safe harbor sure looks more attractive.
NOTE: Earnings growth rate is over the next three to five years. SOURCES: Ycharts.com, Bloomberg