Exxon Mobil Corporation XOM is currently considered expensive on a relative basis, with the stock trading at a 6.95x trailing 12-month Enterprise Value to Earnings Before Interest, Taxes, Depreciation and Amortization (EV/EBITDA), which is a premium compared with the broader industry average of 4.28x. A premium valuation typically reflects strong market confidence in a company’s prospects.
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However, this higher price demands careful examination of whether it is justified by the company’s fundamentals, growth potential and current market conditions.
Key Growth Engines for ExxonMobil: Permian & Guyana
With a strong focus on strengthening its presence in the Permian, ExxonMobil completed the acquisition of Pioneer Natural Resources Company on May 3. With 1.4 million net acres of the combined company in the Delaware and Midland basins, having an estimated 16 billion barrels of oil equivalent resource, ExxonMobil has greatly transformed its upstream portfolio.
The company expects that based on 2023 volumes, its production from the most prolific basin will more than double to 1.3 million barrels of oil equivalent per day (MMBoE/D). For 2027, the energy giant expects its Permian production volume to increase to 2 MMBoE/D.
Similar to its operations in the Permian, ExxonMobil boasts a robust project pipeline in offshore Guyana resources. The company is well-positioned to generate significant returns from both the Permian and Guyana due to low production costs in these assets. With oil prices remaining favorable this year, ExxonMobil is poised to generate substantial cash flows from its upstream operations, which contribute the most to its total earnings.
ExxonMobil’s Integrated Model and Financial Discipline
Due to its integrated business model, ExxonMobil is well protected when oil prices decline. This is because, apart from exploration and production activities, the company has an extensive footprint in refining and chemical businesses.
During uncertain times, ExxonMobil can rely on its robust balance sheet. Compared to the industry’s composite stocks, which have a debt-to-capitalization ratio of 22.38%, ExxonMobil maintains a much lower ratio at 13.34%. Favorable commodity prices have enabled it to enhance its financial position and repay the debt incurred during the pandemic.
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Chevron Corporation CVX is another integrated energy giant with a strong balance sheet. Belonging to the same industry, Chevron has a slightly higher debt-to-capitalization ratio of 14.13%. BP plc BP, another major player in the integrated energy space, is also reducing its debt load, which is backed by higher oil prices and decreased capital spending. BP’s debt-to-capitalization ratio is much higher at 41.82%.
ExxonMobil’s Next Frontier: Lithium, LNG & Carbon Growth
ExxonMobil is expanding beyond its traditional upstream and downstream energy operations by entering the lithium market, a key material for electric vehicle (EV) batteries. As global demand for lithium surges alongside the growth of EVs, ExxonMobil is strategically positioned to capitalize on this long-term opportunity. Additionally, the company’s ongoing LNG initiatives, including the Golden Pass and Qatar expansions, alongside ambitious carbon capture and storage projects, offer significant growth potential. These efforts are set to strengthen ExxonMobil’s competitive edge in the evolving energy transition landscape by leveraging its expertise in high-growth, high-demand sectors.
Is XOM's Premium Valuation Supported by Fundamentals?
The positive developments have led to ExxonMobil’s premium valuations, as investors have high expectations for the company’s future growth and profitability. Consequently, they are willing to pay a premium for the stock, believing it will continue outperforming its peers and the broader market. Year to date, XOM has risen 20.7%, significantly outpacing the 11.8% jump of the industry’s composite stocks.
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However, there are some uncertainties surrounding the stock. Declining refining margins and a nearly 60% year-to-date plunge in earnings from Energy Products, as the company reported along with third-quarter 2024 results, highlight significant risks.
Also, with most of its earnings generated from upstream operations, the company’s overall business is highly vulnerable to volatility in oil and gas prices.
Thus, though XOM’s long-term outlook remains strong, investors are advised to be cautious. Hence, instead of rushing to add XOM, carrying a Zacks Rank #3 (Hold), to their portfolios, it may be prudent to wait for a more opportune entry point. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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