Exxon Stock Will Soar With The Imminent Rise In The Oil Price

  • Oil prices are poised to increase, which will cause Exxon's upstream earnings to recover.
  • One factor that can change the fragile balance between oil supply and demand is the economic crisis in Venezuela.
  • The average target price of the top analysts is at $94, however, in my opinion, shares could go higher.

Historically most Exxon Mobil (NYSE:XOM) earnings came from upstream (exploration and production) operations. Before the crash in oil prices, upstream operations accounted for about 75% of Exxon's earnings. However, as a result of the fall in oil prices, Exxon's earnings from upstream operations declined from $6,416 million in the third quarter of 2014 to a loss of $76 million in the first quarter of 2016. In the second quarter of 2016 upstream operations achieved a small profit of $294 million, as shown in the chart below.

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However, in my opinion, oil prices are poised to increase significantly, which will cause Exxon's upstream earnings to recover, greatly benefiting its stock price. There are continuing signs of improving oil fundamentals. According to OilPrice.com, market fundamentals continue to suggest that the combination of robust demand and weak supply growth will move global oil markets closer into balance by the end of the year.

One factor that can change the fragile balance between oil supply and demand is the economic crisis in Venezuela. This country which holds the worlds largest proven oil reserves has seen its oil production decline from 3 million barrels a day in 2008 to about 2.1 million barrels per day this year, and its oil production is expected to drop even further. Venezuela's massive financial problems have caused two leading oil services companies Halliburton (NYSE:HAL) and Schlumberger (NYSE:SLB) to announce that they will cut back their operations in Venezuela due to unpaid bills. Without new investments and proper services on its existing oil fields, production will continue to decline. Moreover, its state-run oil company, PDVSA, has a very large debt which might prevent it from making new investments to keep oil production at the current level.

Oil prices have already shown a significant rebound this year. As such, we can expect much better results for Exxon's upstream operations in the future quarters. Brent crude is trading at around $50 per barrel, up 87% from its 12-year low of $27.11 on January 20, while WTI crude oil price of $49.11 per barrel is up 88.5% from its February 11 low of $26.05.

Brent Crude Oil, October 2016 Leading Contract With 50 Day Moving Average

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WTI Crude Oil, October 2016 Leading Contract With 50 Day Moving Average

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In my previous article about Exxon, I referred to the company's announcement on June 30, of world-class oil discovery with a recoverable resource of between 800 million and 1.4 billion oil-equivalent barrels, in offshore Guyana. I also said that, in my view, the fact that the exploration took part in deep water (the well was drilled to 5,475 meters in 1,692 meters of water) demonstrates Exxon's belief in the recovery of oil prices, since exploration and production in deep water are more costly than onshore drilling.

XOM's stock

Since the beginning of the year, XOM's stock is already up 12.6% while the S&P 500 Index has increased 6.8%, and the Nasdaq Composite Index has gained 4.6%. However, since the beginning of 2012, XOM's stock has gained only 3.6%. In this period, the S&P 500 Index has increased 73.7%, and the Nasdaq Composite Index has risen 101.1%. According to TipRanks, the average target price of the top analysts is at $94, an upside of 7.1% from its August 19 close price. However, in my opinion, shares could go higher.
XOM stock price chart

Source: Exxon Stock Price Chart by amigobulls.com

Peers Comparison

The table below compares some of Exxon's important parameters to other supermajor oil & gas companies. Exxon's current dividend yield of 3.42% is the lowest among the group. However, its projected sales growth, return on assets and return on equity parameters are the best in the group.

2016-08-20 11_47_55-XOM 20-8-16 - Microsoft Word 4

Source: Portfolio123

Conclusion

In my opinion, oil prices are poised to increase significantly, which will cause Exxon's upstream earnings to recover, resulting in a considerable rise in its stock price. Market fundamentals continue to suggest that the combination of robust demand and weak supply growth will move global oil markets closer into balance by the end of the year. One factor that can change the fragile balance between oil supply and demand is the economic crisis in Venezuela where oil production is declining. Oil prices have already rebounded significantly this year, and while waiting for another remarkable recovery in the price of oil, investors can enjoy Exxon's generous dividend, currently yielding 3.42%. The average target price of the top analysts is at $94, an upside of 7.1% from its August 19 close price. However, in my opinion, shares could go higher.

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Author's Disclosures & Disclaimers:
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
Amigobulls Disclosures & Disclaimers:

This post has been submitted by an independent external contributor. This author may or may not hold any positions in the stocks discussed. Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. Amigobulls has not verified the author’s positions in the stocks discussed, and does not provide any guarantees in this regard. The author may be paid by Amigobulls for this contribution, under the paid contributors program. However, Amigobulls does not guarantee the authenticity or accuracy of the information provided by the author in this post.

The author may not be a qualified investment advisor. The opinions stated in the post should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Amigobulls does not have any business relationship with any of the companies covered in this post. This post represents the views of the author/contributor and may not reflect the views of Amigobulls.

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