Exxon investors’ long-time suffering may end in the New Year.
Oil and gas giant ExxonMobil (NYSE: XOM) could soon go from bleeding cash to gushing profits, with some serious upside.
Bank of America Merrill Lynch has even tapped XOM as its top 2020 stock pick, arguing that the stock could surge 47% as production ramps up and growth accelerates.
The energy sector has been a disaster lately as evidenced by the miserly 4.01% return by the industry’s favorite benchmark Energy Select Sector SPDR Fund (XLE) vs. 25.01% by the S&P 500.
Yet, somehow, XOM has managed to go a notch lower with a 2.16% YTD return. XOM stock has fallen out of favor with the investing universe due to the company’s high cash burn as it continues to frantically fund growth plans--not to mention its four-year long court battle in New York over climate change.
Exxon has been investing heavily in boosting production, including in U.S. shale fields in the Permian Basin as well as in projects offshore Guyana. Additionally, the company could sell oil and gas fields in Europe, Asia and Africa worth up to $25 billion as it looks to pump more money into major projects in Guyana, Papua New Guinea and Mozambique.
XOM did actually manage to beat Wall Street’s earnings estimates during the last quarter; however, third-quarter earnings of $3.2 billion - 75 cents per share - were down sharply from $1.46 per share a year earlier.
Moody’s chimed in with a downgrade, lowering Exxon’s credit outlook from Stable to Negative, saying that the company was burning too much cash and was cash flow negative.
However, all the pessimism has not stopped BofA Merrill Lynch from waxing bullish about the oil giant, saying that 2020 could “finally be Exxon Mobil’s year”.
The banker sees the company becoming cash flow positive in 2020 and XOM stock rallying to $100, or 43.6% upside from current price of $69.66.
“The inflection in Permian production is well under way while the first oil from Guyana confirmed for December kick starts what we expect to be 7-8 years of growth…” they gushed. Related: Russian Oil CEO: OPEC+ Cuts To Keep Oil Between $55 And $65
This optimism isn’t misplaced. XOM recently told Argus that it’s waiting for regulatory approval before commencing a 31-well exploration program in offshore Guyana.
That’s understandable because the oil discoveries have taken the tiny nation by surprise and the country is still in the process of crafting relevant new laws and establishing a regulatory body that will oversee exploration and production.
XOM has revealed that it plans to start production from the Liza field on the deepwater Stabroek block imminently, starting with 120K bbl/day and ramping up to 750K bbl/day by 2025.
The company recently announced a 14th discovery at Stabroek, bringing its total recoverable reserves to more than 6 billion barrels of oil equivalent.
Exxon has characterized Guyana as 'a fairy tale' discovery, easily one of the industry’s biggest finds in decades.
But it hasn’t been a fairy tale for everyone.
Tullow Oil’s discoveries in the same basin have turned up lower-quality oil than hoped for. That, combined with failure to meet production targets and trouble in Ghana, led to the ouster this week of Tullow CEO and exploration director Paul McDade, which came as a shock to investors who promptly punished the company.
What About Oil Prices?
There is some skepticism as to whether XOM can really rally over 40% in the New Year if oil prices remain low.
The EIA has forecast Brent will average $60/b in 2020, lower than the 2019 average of $64/b. The Paris-based organization expects crude prices to trend lower in the coming year mainly due to rising inventories, particularly in the first half of the year.
The longer-term outlook, however, could be brighter, especially if the U.S. and China are able to strike a comprehensive trade deal because it would alleviate concerns about future oil demand.
But as long as XOM’s production plans remain on track, the stock has room to run.
The psychology of the Exxon 2020 is contrarian: Everyone else is fearful, so it’s time to take advantage of that. The very quiet indications are that Exxon has already adjusted to the oil price reality of oil trading in a range that doesn’t dip below $50 or soar above $70.
For Exxon, the past year has been exactly about this adjustment, and even if BofA is rather exuberant in its forecast, one way or another, 2020 should be a major comeback year for XOM. It’s burned the cash specifically with an eye to profits on the existing oil price range. Related: Lower Oil Production Will Cause Saudi Budget Deficit To Balloon
The icing on the cake is Exxon’s amazing 5% dividend yield, but 2020 is about far more than dividends.
Plenty of investors might say Chevron is the better bet here because it’s outperformed Exxon for shareholders for the past couple of years. But while Chevron was focusing on super efficiency, and investors have indeed been rewarded, Exxon wasn’t just twiddling its thumbs. It has been working on a strategy, too--even if that required a bit of sacrifice.
By 2025, Exxon plans to double its operating cash flow and earnings. That should begin to show quite noticeably in 2020, and there is plenty of reason to believe that XOM could near $100.
Already Exxon is gearing up for a better 2020. On Tuesday, Exxon was finally vindicated in its 4-year long court battle with the New York Office of the Attorney General. The court found that Exxon did not mislead its shareholders.
By. Charles Kennedy for Oilprice.com
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