After hitting a 52-week low on Oct. 1, U.S. benchmark West Texas Intermediate (WTI) crude oil prices surged nearly $8 per barrel in two days as Middle East tensions threaten to take supply offline. Oil prices had been under pressure from a ramp-up in U.S. production, paired with potentially higher OPEC+ supply.
ExxonMobil (NYSE: XOM), the most valuable U.S. energy stock by market cap, notched a fresh all-time high on Oct. 4. Here's why the dividend stock could be a balanced buy now, but why it could underperform the energy sector if oil prices continue surging.
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Rising to the challenge
ExxonMobil has been the standout among its peer group year to date -- outperforming the energy sector by a wide margin. Meanwhile, Shell, Chevron, TotalEnergies, Eni, BP, and Equinor are all underperforming the sector.
ExxonMobil has proven it can navigate a mediocre oil price environment while continuing to invest in efficient assets to grow production. On Oct. 3, ExxonMobil filed a form 8-K that provided insight into what investors can expect when it reports its third-quarter 2024 results on Nov. 1.
ExxonMobil earned $7.1 billion from its upstream segment in second-quarter 2024, but expects lower liquid fuel prices to impact its third-quarter upstream results by $600 million to $1 billion. It also expects lower refining margins to impact its energy products segment by $600 million to $1 billion. Even if ExxonMobil's earnings decline by the high end of its estimates, it would still generate more than enough profit to cover its dividend expense -- which costs the company about $4.3 billion per quarter.
The company made $5.2 billion in buybacks in the second quarter. Now that its acquisition of Pioneer Natural Resources is complete, it expects to ramp the pace of buybacks -- reaching $19 billion in share repurchases in 2024. While lower oil prices are unlikely to impact ExxonMobil's dividend, we could see the company slow down on buybacks in the near term and adjust its 2024 buyback target.
ExxonMobil has raised its dividend for 42 years in a row. This track record, combined with ExxonMobil's diversification across the oil and gas value chain, makes it one of the most reliable income stocks in the oil patch.
In sum, ExxonMobil can reward investors in a variety of oil price environments. It doesn't depend on ultra-high oil prices to turn a profit, nor does it unravel when oil prices fall. However, other companies will likely benefit more from rising oil prices than ExxonMobil.
High risk, higher potential reward
When oil prices rise, pure-play exploration and production (E&Ps) companies are the biggest winners. E&Ps focus on producing liquids and gas for the lowest price possible and selling them for the highest price possible, whereas ExxonMobil has a massive refining and marketing segment, a growing low-carbon business, and more.
Not all oil and gas reserves are equal. Factors like geology, access to resources like sand and water needed in fracking, infrastructure, and labor costs can make some plays more capital-intensive, with lower margins. For example, Venezuela has extensive proven oil reserves, but they are expensive to process. By comparison, Saudi Arabia has abundant, high-quality oil reserves that can be produced inexpensively.
Producers have been flocking to high-margin areas like the Permian Basin because the region can make money even when oil prices are lower. The Permian's advantages are a key reason why ExxonMobil bought Pioneer Natural Resources -- one of the largest Permian producers. ExxonMobil expects to reach 2 million barrels of oil equivalent per day in Permian production by 2027.
Companies with high-quality assets shine when oil prices are falling. But when oil prices rise, it can make less-efficient operators more profitable. Rising oil prices can also benefit leveraged companies. Some E&Ps choose to take on a lot of debt to compound returns during expansion periods. However, this strategy also magnifies losses during downturns.
Therefore, the lowest-quality, highest-leveraged E&Ps benefit the most from rising oil prices.
Think long term with ExxonMobil
Investors who believe oil prices will continue to soar due to geopolitical tensions may be tempted to buy an ultra-levered-up, low-quality E&P. But a better approach is to target companies that can do well throughout the cycle, not just when oil prices are rising.
ExxonMobil can be a foundational dividend stock, but if oil prices continue to surge, don't be surprised if worse companies outpace its short-term gains.
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Daniel Foelber has positions in Equinor Asa. The Motley Fool has positions in and recommends BP and Chevron. The Motley Fool recommends Equinor Asa. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
