OPEC and its allies (which include Russia) gave the oil markets a good shock this month.
The oil-producing group announced plans to increase its production cuts to a whopping 3.66 million barrels of oil per day.
Oil prices responded immediately, with West Texas Intermediate (WTI) crude jumping from $66 per barrel to over $80 in short order.
The mainstream analyst view is that OPEC is wise to put a floor of $80 per barrel under the price of oil.
Some analysts think that the OPEC move could be enough to send oil prices back to $100 per barrel.
But does that mean that Exxon is currently a “Buy”?
I’m not so sure, and I say that for a couple of reasons.
First, as value investors, we can’t be blind to the fact that Exxon shares are already trading near all-time highs.
So this isn’t an opportunity to buy low.
To be fair, though, Exxon shares are trading here for good reason. The company is coming off an incredible 2022.
The company posted a record-high profit of $56 billion. That was a record for not just Exxon, but any Western oil company.
That $56 billion profit translated to earnings per share (EPS) of $13.26, a number that Exxon may not reach again for a while.
Oil prices seem unlikely to average anywhere close to $100 this year, even with the recent OPEC cuts. We have seen oil well under $80 for most of the year so far.
This year, analysts expect Exxon’s EPS to drop almost 25% to $10.29.
Though earnings are falling, the share price hasn’t… at least not yet.
My second concern is that the future of Exxon is going to look very different from its recent past.
Like all major producers, Exxon is trying to diversify its business away from oil and gas production.
Exxon is investing huge dollars in carbon capture, hydrogen and biofuels.
The company’s management estimates that these areas are going to represent a combined market worth of $6.5 trillion by 2050.
In a recent presentation, Exxon revealed that it expects to be generating tens of billions of dollars in revenue from these initiatives within five to 10 years… and hundreds of billions thereafter!
Exxon’s CEO was quoted as saying that these decarbonization businesses could outgrow the company’s legacy oil and gas business in 10 years. Wow!
The appeal of these new revenue streams is that they won’t have the volatility of oil and gas production, which relies on unpredictable commodity prices.
Instead, the decarbonization revenue will be tied to predictable, long-term contracts.
While this new business venture sounds exciting, my concern is that Exxon is wading into uncharted waters.
These new ventures are just that: new.
Rating Exxon Stock
Exxon is betting the future of the company on these businesses, and I think at this early point, it is uncertain how profitable they are going to be.
As an investor, I don’t have any ability to know just how well these big investments into entirely new businesses will turn out.
Without knowing that, it’s hard for me to be bullish about the stock.
Because the stock price has already had a big run on the back of last year’s record profits – which likely won’t be repeated – and because of the uncertainty over these new non-oil and gas production initiatives…
The Value Meter rates Exxon Mobil as just “Appropriately Valued.”