Table of Contents
- 1 1. The price is below $35 for the first time in 15 years
- 2 2. How much of the price decline was due to removal from DJIA?
- 3 3. Long-term oil price to stock price looks favorable
- 4 4. There has been some good news lately
- 5 5. A dividend cut is possible, but at this point, invest for capital gains
- 6 Conclusion:
- 7 Risks, alarm bells, and red flags
Exxon Mobil (XOM) has dropped below $35 giving it a current dividend rate of over 10%. That is a substantial distribution but not the main reason to buy because the dividend may indeed be cut as I discussed here “Exxon Mobil Needs Some Good News To Avoid A Dividend Cut”.
I have also written about Exxon when I thought it was overpriced “No Ha-Ha At Doha: Saudi Arabia Raises The Oil-Price Ante, And Exxon’s Credit Takes A Hit” and again when I thought it was a buy “Exxon Mobil: I Told You To Sell At $88, Now I’m Telling You To Buy At $48”.
I was certainly too early when I wrote that last article as Exxon has continued to drop over the last few months. But now at less than $35, I have come to the conclusion (again) that this really is the time to buy.
Here are 5 reasons I think it is time to buy Exxon regardless of what happens to the dividend.
1. The price is below $35 for the first time in 15 years
Well, not counting the 2020 COVID response when it dropped to $31. I see that as an aberration.
That is a long, long chart and would suggest it is up from here assuming, of course, that oil prices recover at least to some degree.
2. How much of the price decline was due to removal from DJIA?
If we look at the price action since the announcement that Exxon was being removed from the Dow Jones Industrial Average (DJIA), we see a strong trend down.
So, how much of this downward trend was due to removal and how much due to oil prices?
As the chart below shows, the price of oil has remained relatively steady while the stock price has consistently gone down. This would imply that at least some of Exxon’s price decline has been due to the removal, and if true, then the Exxon price should recover from that issue at some point.
3. Long-term oil price to stock price looks favorable
Over most of the last 15 years, Exxon’s price and oil prices have maintained a fairly close relationship. But now as the price of Exxon breaks down below $35, the price relationship becomes much more advantageous to Exxon if oil prices go up.
Note that from 2006 to 2015, Exxon to oil was pretty steady. Then starting in 2015, Exxon’s price took a big divergence upward relative to the price of oil.
But now with the price under $35, it approaches the historical value, i.e., if oil prices go up, Exxon’s price should follow.
4. There has been some good news lately
The bad news has followed Exxon for months, but now there appears to be some good news.
1. Guyana has agreed to allow drilling on Exxon’s Payara development. This after months of delay due to elections bringing in a new President.
“Guyana’s government will sign an agreement with Exxon Mobil [NYSE:XOM] this Friday that clears the way for the development of the 220K bbl/day Payara project on the deepwater Stabroek block, the country’s natural resources minister says.”
2. Exxon is selling 15 oil fields in the North Sea and should collect about $1 billion for them by Q1 2021.
One advantage of asset sales is they can be used to support the dividend without using debt.
In all, Exxon is targeting $15 billion in asset sales by 2021 which interestingly would more than cover 4 quarters of dividends at $3.25 billion each.
Neil Chapman, senior vice president of Exxon Mobil:
“We’re achieving that by adding the best set of projects we’ve had in many years and divesting assets that have lower long-term strategic value. This sale is an important part of our divestment program, which is on track to meet our $15 billion target by 2021.”
3. Exxon expects up to $1.8B Q3 boost from upstream liquids prices.
This is from SA see here.
5. A dividend cut is possible, but at this point, invest for capital gains
I have said a dividend cut is likely within the next 2 quarters unless oil prices break higher. I explained my reasoning in this article “Exxon Mobil Needs Some Good News To Avoid A Dividend Cut”.
But as you can see from point 4 above, there has been some good news and it is possible that Exxon management is planning on cash from asset sales to fund the dividend until operations generate more cash flow.
And management continues to say their goal is not only to keep but to raise the dividend.
From Economic Times 09/10/2020 (see here):
“We remain committed to our capital allocation priorities – investing in industry advantaged projects, paying a reliable and growing dividend, and maintaining a strong balance sheet,” said spokesman Casey Norton.
The words “growing dividend” is interesting in the current context that a dividend cut is inevitable.
We know for sure Exxon is not going out of business nor will it be filing for bankruptcy. So that means at some point if the price is low enough, it becomes a buy for capital gains purposes. I would argue that time is now.
And maybe, just maybe, you might get a 10% dividend too.
Exxon is a buy under $35 if you think oil prices will reach $50 by the end of 2021.
Risks, alarm bells, and red flags
One problem with any petroleum-related business is government regulation. It can change in a moment and on a political whim. You need to look no further than the recent legal decision against the Dakota Pipeline (see here).
In a volatile environment like we are facing now, cash is always a viable alternative.
In addition, there could be a recession coming or even a depression according to several economists. That may make profits elusive at best and provide losses at worst.
“”Economic data in the near future will be not just bad, but unrecognizable,” Credit Suisse economists led by James Sweeney wrote last week. Anomalies will be ubiquitous and old statistical relationships within economic data or between market and macro data might not always hold… There is no blueprint for the current shock, and uncertainty about the extent of contagion and the economic consequences is overwhelming.”
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Disclosure: I am/we are long XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.