Is Exxon Stock a Buy?
Given market conditions, the company should be a winner, and Morningstar’s analyst prefers it to Chevron.
While many of its peers have announced intentions to divert investment to renewables to achieve long-term carbon intensity reduction targets, ExxonMobil XOM remains committed to oil and gas. It has responded to calls to bring in more outside voices to its board and announced emissions reduction targets. It is also investing in low-carbon technologies, but each of these efforts is measured and keeps oil and gas production at the core. While this strategy is unlikely to win praise from environmentally oriented investors, we think it’s likely to prove more successful and probably holds less risk. High commodity prices and strong refining margins appear to be in place for a few years, absent an economic slowdown. A low-cost position combined with attractive upstream and downstream growth should make Exxon a winner.
We view Exxon’s competitive position as weakened relative to where it has been historically. As a result, we forecast lower future excess returns than in the past, but we expect improvement from recent levels so that they are sufficient to maintain a narrow moat rating. We continue to see Exxon’s integrated model as a source of competitive advantage. Historically, Exxon has rated as the highest-quality integrated firms, given its ability to capture economic rents along the oil and gas value chain. While its peers operate a similar business model with the same goal, they have largely failed to replicate Exxon’s success, as evidenced in their comparatively lower margins and returns.
We recently raised our fair value estimate to $102 per share from $96 per share after incorporating the latest strategic guidance, financial results, and commodity prices. Our fair value estimate implies a forward enterprise value/EBITDA multiple of 5.4 times our 2023 EBITDA forecast of $82.2 billion. We assume U.S. natural gas prices of $7.01 per thousand cubic feet in 2022 and $5.72 in 2023. Our long-term assumption is $3.30 beginning in 2025. For oil, we assume Brent prices of $106 per barrel in 2022 and $94 in 2023. Our long-term oil price assumption is $60 per barrel. We assume a cost of equity of 7.5% and a weighted average cost of capital of 7.1%.
Exxon holds a High Uncertainty Rating based on our scenario analysis and evaluation of its environmental, social, and governance risks. The level of commodity prices and margins is the company’s primary risk. Exxon faces the risk that global oil demand falls quickly, leaving it unable to fully develop its reserves. Our research suggests oil demand will not decline materially for several more decades, implying that more supply will be needed and the risk of stranded assets for Exxon is low. Greater adoption of electric vehicles in the U.S. and Europe could threaten the long-term viability of Exxon’s downstream assets, but we think they will remain viable for decades given their low cost, complexity, size, and integration with chemicals.
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Allen Good does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.