Key Takeaways
- XOM stock is trading at a 6.64x trailing 12-month EV/EBITDA; the broader industry average is currently 4.19x.
- Over the past year, XOM has risen 20%, significantly outpacing the 15.9% jump of industry composite stocks.
- XOM fundamentals and strategic investments are strong, but investors might benefit from patience.
Exxon Mobil Corporation XOM is currently considered expensive on a relative basis, with the stock trading at a 6.64x 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 4.19x. Such a premium valuation often signals strong market confidence in the company’s prospects.
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However, this elevated price necessitates a thorough assessment of the company’s fundamentals, growth potential and prevailing market conditions to check if it is justified.
ExxonMobil’s Growth Engines: Spotlight on Permian & Guyana
With a strong focus on strengthening its presence in the Permian – the most prolific basin in the United States – 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 and an estimated 16 billion barrels of oil equivalent resource, ExxonMobil has greatly transformed its upstream portfolio.
ExxonMobil aims to double production in the Permian Basin from current levels to 2.3 million barrels of oil equivalent per day (MMBoE/d) by 2030.
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 Permian and Guyana due to low production costs in these assets.
Importantly, advantaged assets like the Permian Basin, Guyana and liquefied natural gas play a pivotal role in ExxonMobil’s upstream portfolio. By 2030, more than 60% of total upstream production will be derived from these assets, categorized as "advantaged" due to their lower cost of supply, higher returns and strategic geographic positioning. For details, read: ExxonMobil Unveils Earnings Growth Strategy Worth $20B Till 2030.
Driving Success: XOM’s Integrated Model & 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 22.36%, ExxonMobil has 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 on higher oil prices and decreased capital spending. BP’s debt-to-capitalization ratio is much higher at 41.82%.
XOM: Surplus Cash Flow & Clean Energy Commitment
The integrated energy giant plans to generate $165 billion in surplus cash flow over the 2025-2030 period, thanks to disciplined capital allocation and improved earnings power. This surplus cash will support increased shareholder distributions, including dividends and share repurchases, enhancing the company's track record of delivering consistent shareholder value.
Moreover, ExxonMobil’s plans to invest $30 billion in low-carbon solutions from 2025 to 2030 underscore its commitment to sustainability and growth. A key focus is on carbon capture and storage networks and hydrogen facilities, including the world’s largest low-carbon hydrogen plant in Baytown, producing near-carbon-free hydrogen. With 65% of investments targeting third-party emission reductions, this strategy aligns with global energy transition goals while leveraging ExxonMobil’s expertise to deliver strong returns.
Do Fundamentals Justify ExxonMobil’s Elevated Valuation?
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. Over the past year, XOM has risen 20%, significantly outpacing the 15.9% jump of the industry’s composite stocks.
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Despite these promising developments, several uncertainties cloud the stock. While the company highlights its advantaged assets, much of its upstream production remains dependent on fossil fuels, leaving it vulnerable to regulatory challenges and market shifts amid the global energy transition.
Additionally, with its continued emphasis on oil and gas, ExxonMobil is at risk of heightened scrutiny from environmental groups and stakeholders pushing for cleaner energy solutions.
Furthermore, the company’s plan to invest $140 billion in major projects and Permian Basin development by 2030 could become a financial strain if energy prices fail to meet expectations.
While the Zacks Rank #3 (Hold) XOM’s robust fundamentals and strategic investments position it as a strong player in the energy space, the current premium valuation, uncertainties surrounding its reliance on fossil fuels, stakeholder pressures and high capital expenditures suggest that investors might benefit from patience. Waiting for a more favorable valuation could reduce risk and enhance long-term returns. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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