- Although the company is still running a cash flow deficit, analysts expect Exxon to be cash flow neutral at $40 a barrel.
- Its balance sheet is the best in the sector by far. At any time it can leverage its balance sheet to reward shareholders.
- Crude oil has just printed a daily cycle low. I see rising prices both in the near term and long term.
I recently stated in my articles that scaling into a position in one's portfolio in energy was essential in my opinion especially given the huge decline oil prices experienced up to February of this year. Although stocks have continued to charge higher in recent month, on a historic basis, equities are still quite overvalued compared to oil. Why? Well when we look at the 200 week moving average for the S&P500, we can see it is trading at around 1,782 which is about 13% below where the index is trading at present (2,062). On the contrary, crude oil's 200-week moving average is trading at $76 a barrel which is a whopping 58% above the current price of crude ($48.46 - see chart).
This is why one needs to be diversified in energy as from a historic basis, this asset class has more upside potential. Exxon Mobil (NYSE:XOM) has rallied by over 16% year to date and many investors are waiting for a pullback before entering again. However, if crude oil prices continue to increase, this integrated behemoth may keep on charging forward in the near term and not produce the pullback many investors are waiting for. Therefore, my recommendation would be to buy now if you can hold for the long term. With crude oil still massively undervalued on a historic basis, valuations of energy stocks could simply keep on rising before they plateau out.
Exxon Mobil To Be Cash Flow Neutral At $40 A Barrel Next Year
Exxon bumped up its quarterly dividend pay-out to $0.75 per share in May which was a rare dividend increase in a sector blighted with debt and cash flow problems. Exxon is still not cash flow neutral as was highlighted again in the first quarter. Cash flow from operations (from Q1-2015 to Q1-2016) came in at $31 billion (see chart) which wasn't enough to cover the company's capex budget ($35 billion) and dividends ($11 billion).
The company issued $12 billion in debt in the first quarter which was the right decision (in favor of more asset sales) when you see the current trajectory of oil prices. This is where investors should be focusing in my opinion. Although Exxon is still nowhere near being cash flow neutral this year, constant cost cutting and productivity measures are predicted to enable the company become cash flow neutral at $40 a barrel next year which is $8 below where we currently are trading.
Leverage And Operating Cash Flows Are The Best In The Industry
Compare this with Chevron's (NYSE:CVX) $52 a barrel and you start to see why Exxon Mobil looks very attractive from a dividend point of view. Every oil company has suffered since 2014 and investors should be comparing Exxon to its peers instead of comparing it to equities outside energy which have slick financials. Exxon's debt to equity ratio, for example, looks very strong at 0.19 and its cash flow shortfall is not as much (as a percentage of cash flow - see chart above) compared to other companies in this sector. The longer crude oil can stay above $50 a barrel, the more I see Exxon returning capital in droves to its shareholders going forward, which is why you will continue to see this stock trade at a premium as its balance sheet is the best in the sector by far.
Crude Oil Rally Still Has More To Go
On the technical chart, crude oil doesn't seem anywhere near a top at this stage. We bottomed out when the 5 day RSI indicator became oversold and I don't see a final top until sentiment levels reach ultra optimistic levels. We are now 19 weeks into this intermediate cycle which should last another 6 weeks at least before this cycle tops out. However, as we have seen in the precious metals market, intermediate declines (May) can be very mild and not produce the pullback that many look for. Therefore, it may be better just to hold through any downturn. We have seen already how stable Exxon Mobil has traded over the last 2 years compared to its competitors. I believe this behavior will continue.
To sum up, although I believe there will be a mild pullback in crude oil when sentiment (see chart) gets too optimistic, Exxon Mobil stock may keep on rallying. Why? Because the more stable this asset class gets, more and more dividend investors will scale into this stock which will keep its valuation elevated. Furthermore, it is predicted that the company will be cash flow neutral if crude oil is at $40 a barrel next year which should mean more meaningful dividend raises. If you are a dividend investor, Exxon's 3.31% yield plus its cash flow projection numbers for 2017 should mean more share buybacks and dividend increases going forward.
Source : Sentimentrader.com