WTI crude oil prices stabilized above $68 per barrel on Wednesday morning after a sharp pullback in the past week. Despite the reversal, oil prices remain near multi-year highs, and analysts see a long-term opportunity ahead for Exxon Mobil Corporation (NYSE: XOM) investors.
On Wednesday, RBC Capital Markets analyst Biraj Borkhataria upgraded XOM stock to an “outperform” rating and said investors seem to be underappreciating Exxon’s financial health.
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In the past three years, XOM stock has lagged the market and its oil major peers, declining 5.8 percent. Borkhataria says recent poor performance has been due to Exxon’s heavy investments and disappointing earnings numbers.
Exxon has been aggressive with its spending throughout the recent oil market downturn, but Borkhataria says that aggressiveness will likely prove to be a good decision in the long term. “Exxon Mobil has historically been one of the most successful super-majors at investing through the business cycle and taking advantage of downturns by lowering its cost structure and high-grading its asset base,” he says.
Borkhataria says the potential long-term benefits of Exxon’s investments make it one of the most attractive value opportunities in the energy sector, and patient investors will start to see the investments pay off starting in 2019. Assuming oil prices remain stable or continue to trend higher, Exxon should see healthy profits and cash flow from its oil-producing properties.
Borkhataria says Exxon will likely choose to return a large part of that cash flow to shareholders.
“From now to 2025 we see the potential for substantial dividend growth alongside superior returns, both of which appear underappreciated to us,” he says.
Exxon’s current dividend yield of 4.1 percent is the third highest among the 30 Dow Jones industrial average stocks.
Bank of America analyst Doug Leggate says Exxon management has chosen to prioritize dividend growth and debt reduction over buybacks in recent quarters, but that trend may soon change as the company’s cash flow improves.
“Much of XOM’s planned growth is now within its control, while a planned increase in disposals has capacity to fully recover acquisition costs in recent years and bolster available cash for shareholder returns,” Leggate says.
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Leggate says Exxon is on a path to double free cash flow by 2025.
In addition to the “outperform” rating, RBC has a $100 price target for Exxon. Bank of America has a “buy” rating and $110 target for XOM stock.
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Oil Prices, Cash Flow Make Exxon Mobil Corporation (XOM) Stock a Value originally appeared on usnews.com
