COM - Exxon Mobil: My First Strong Buy Oil & Gas Play For 2024

2024-01-05 13:30:00 ET

Summary

• Exxon Mobil Corporation stock has delivered a flat 1-year total return as investors rotated out after its 2022 cycle peak. XOM investors shouldn't be surprised.
• The energy sector is assessed to be 8% below its fair value, suggesting relatively attractive opportunities compared to the US market.
• Exxon Mobil's growth metrics are expected to improve, potentially attracting more buyers and leading to an uptrend continuation for the stock.
• I assessed that inward sector rotation to energy stocks had already started in mid-December and continued through the first week of 2024.
• I argue why high-quality plays like XOM are well-poised to benefit from a welcomed sector rotation, as I'm ready to upgrade it into a Strong Buy.

Exxon Mobil Corporation ( XOM ) investors who added in early 2023 haven't had much to cheer about over the past year. Accordingly, XOM delivered a flat 1Y total return, as its dividends helped to mitigate the languid price performance. However, after a blistering year in 2022, as XOM recovered its mojo, a consolidation phase allowing sector rotation and profit-taking shouldn't surprise holders. A healthy consolidation phase will enable investors to assess XOM's key support zones and possible resistance levels. As a result, it helps provide us with insights to glean attractive risk/reward opportunities for leading integrated oil and gas players like Exxon Mobil.

As the S&P 500 ( SPX ) ( SPY ) and the Nasdaq ( QQQ ) ( NDX ) started 2024's trading year with a sharp pullback, the energy market ( CO1:COM ) ( NG1:COM ), as seen by its underlying futures, remain above their December 2023 lows. Based on Morningstar's sector valuation estimates, the energy sector ( XLE ) is assessed to be 8% below its implied fair value, suggesting relatively attractive opportunities compared to the fairly valued US market.

Given the recent strength in energy stocks, could XOM and its leading peers be ready to emerge from their slumber after moving nowhere for the past year?

In late October, Exxon Mobil's third-quarter or FQ3 earnings release confirmed that lower energy price realizations and weaker refining and chemical margins affected its overall operating performance. As a result, the company posted a 51% drop in adjusted net income, leading to an adjusted EPS decline of 49% to $2.27. However, analysts' estimates suggest that the worst in Exxon's adjusted net income growth normalization could have bottomed out in FQ3. Despite that, it could take another two more quarters to inflect back into growth. Accordingly, Exxon's adjusted net margin is expected to bottom out in FQ4 (December quarter) before recovering in the second half of 2024.

Astute investors know that the market is forward-looking. Therefore, if Exxon Mobile's growth metrics are expected to improve further, it should attract more robust buying sentiments as more buyers potentially return. I believe Exxon Mobile remains well-positioned to navigate the recent challenges and bolster its higher-margin production moving ahead. Its operations in the Permian have been lifted with the acquisition of Pioneer Natural Resources ( PXD ), as I highlighted in my previous update. I indicated that the deal value isn't excessive and expected to be accretive to XOM's bottom line. While a near-term share dilution likely affected investor sentiments, I don't expect the decline to worsen, as XOM bottomed out neatly in mid-December, in line with the underlying energy markets.

Furthermore, it has provided an expected boost to Exxon Mobil's production growth through 2027, coupled with its operations in Guyana. Based on the updated Wall Street estimates, Exxon Mobil is projected to deliver an average total production of 4.25 mboe per day by 2027, nearly 14% above 2023 production estimates. Given the higher margin quality from these assets, it should help Exxon Mobil sustain its adjusted net margin in the medium term, despite the normalization from its 2022 cycle peak.

XOM is valued at a forward EBITDA multiple of 5.4x, well below its 10Y average of 7.2x. Its forward dividend yield of 3.7% should bolster buying sentiments in its high-quality business model, corroborated by Seeking Alpha Quant's best-in-class "A+" profitability grade. XOM is also assigned a "B-" grade for dividend safety, bolstering the outlook for XOM from a total return basis if its December 2023 bottom holds robustly.

My analysis suggests that XOM formed an astute bear trap ( false downside breakdown ) in December 2023 at the $97.5 level, in line with its March 2023 low. The bullish reversal is expected to be robust, potentially culminating in an uptrend continuation for XOM based on its long-term monthly chart after a year of consolidation.

While I expect XOM's $120 level to remain a robust resistance zone, the risk/reward from the current levels looks relatively attractive. Coupled with the constructive performance in the energy markets suggesting inward sector rotation, I anticipate XOM's implied undervaluation, strong fundamentals, and robust price action to work in its favor in 2024.

As a result, I'm ready to lift XOM into the Strong Buy zone and encourage investors to capitalize before the train leaves the station. In addition, buy levels below the $100 zone should be capitalized aggressively.

Rating: Upgraded to Strong Buy.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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