As oil prices climb, 3 trades on Exxon Mobil
- Exxon Mobil shares have returned nearly 60% since the start of 2022
- The tight balance between supply and demand for petroleum products creates a significant advantage for the oil giant
- Long-term investors might consider buying XOM shares at current levels.
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Energy giant shareholders Exxon Mobil (NYSE:) have seen the value of their investment increase by 67.2% in the past 12 months and 59.5% since the start of the year (YTD). By comparison, the Dow Jones oil and gas index in the United States has gained more than 55% so far this year and hit a multi-year high on May 27. The index is down 12.6% since the start of the year.
On May 27, XOM shares also broke above $97 to hit a multi-year high. The stock’s 52-week range has been $52.10 to $97.93. With a market capitalization (cap) of $411.1 billion, it is the biggest energy name in the United States.
Although there are significant debates surrounding the future of the fossil fuel industry, it will remain a critical source of energy for at least the next decade. So, like many of its peers, Exxon continues to benefit from a strong recovery in demand and rising oil prices.
The Irving, Texas-based energy major recently announced several new discoveries offshore Guyana and launched development of Yellowtail, its fourth offshore oil project in the region. This $10 billion project is expected to generate 250,000 barrels of oil per day from 2025.
Exxon Mobil released first quarter numbers on April 29. was $90.50 million, down from $59.15 billion a year ago. Earnings per share (EPS) came in at $1.28 from 64 cents a year ago. During the quarter, the company generated $14.8 billion in cash flow from operating activities and $10.8 billion in free cash flow.
On the results, CEO Darren Woods commented:
“Earnings increased modestly as strong margin improvement and underlying growth were offset by weather and timing impacts. The absence of these temporary impacts in March provides strong and positive momentum for the second quarter. »
Along with the earnings release, Exxon announced that it had tripled the size of its share buyback program. It will repurchase up to $30 billion worth of stock through 2023. The stock currently offers a dividend yield of 3.61%.
Prior to the Q1 earnings release, XOM shares were changing hands around $85. On May 27, it closed at $97.59, up more than 14%.
What to expect from XOM stock
Among 29 analysts surveyed via invest.com, Exxon Mobil stock has a “neutral” rating. Wall Street has a 12-month median price target of $96.21 for the stock. Such a move would suggest a decline of 1.41% from the current price. The 12-month target range is between $66 and $166.
Exxon Mobile Consensus Outlook
On the other hand, based on a number of valuation models, including P/E or P/S multiples or terminal values, the average fair value of XOM shares on InvestingPro is $117.03.
Exxon Mobil assessment
In other words, the fundamental valuation suggests that stocks could rise close to 20%.
We can also examine XOM’s financial health, determined by ranking over 100 factors against its peers in the energy sector.
For example, in terms of cash flow, growth and profit, it scores 3 out of 5. Moreover, XOM stock scores 4 out of 5 in terms of price momentum. Its overall score of 4 points is an excellent performance ranking.
Currently, XOM’s P/E, P/B, and P/S ratios are 15.9x, 2.4x, and 1.3x. Comparable metrics for peers are 16.6x, 1.9x, and 1.2x. These numbers reveal that despite the recent price increase, Exxon’s fundamental stock valuation more or less mirrors the overall valuation of its industry peers.
We expect XOM shares to trade in a range between $90 and $100 in the coming weeks and then possibly start a new leg. However, movements in the price of oil will also affect the price of Exxon shares.
Adding XOM stocks to portfolios
Exxon Mobil bulls who aren’t concerned about short-term volatility might consider investing now. Their target price would be $117.03, in line with the target provided by the quantitative models.
Alternatively, investors could consider buying an exchange-traded fund (ETF) that holds XOM shares as an asset. Examples include:
- SPDR Energy Select Sector Fund (NYSE:)
- Fidelity® MSCI Energy Index ETF (NYSE:)
- SPDR S&P® North American Natural Resources ETF (NYSE:)
- iShares Core High Dividend ETF (NYSE:)
Finally, investors expecting XOM stock to rise further in the coming weeks might consider setting up a bullish buy spread.
Most options strategies are not suitable for all retail investors. Therefore, the following discussion of XOM stocks is offered for educational purposes and not as an actual strategy for the average retail investor to follow.
Bull Call Spread on Exxon Mobil stock
Intraday price at time of writing: $97.59
In a bullish call spread, a trader has a long call with a lower strike price and a short call with a higher strike price. Both legs of the trade have the same underlying stock (i.e. Exxon Mobil) and the same expiration date.
The trader wants the XOM stock price to rise. In a bullish buy spread, the levels of potential profit and potential loss are limited. The transaction is established for a net cost (or net debit), which represents the maximum loss.
Today’s bullish call spread trade is to buy the 100 strike call expiring on August 19th for $4.75 and sell the 105 strike call for $2.85.
Buying this buy spread costs the investor about $1.90, or $190 per contract, which is also the maximum risk for this trade.
It should be noted that the trader could easily lose this amount if the position is held until expiry and both legs expire worthless, i.e. if the XOM stock price at the expiry is lower than the strike price of the long call (or $100 in our example).
To calculate the maximum potential gain, one can subtract the premium paid from the difference between the two strikes, and multiply the result by 100. In other words: ($5.00 – $1.90) x 100 = 310 $.
The trader will make this maximum profit if the Exxon Mobil stock price is at or above the short call strike price (higher strike price) at expiration (or $105 in our example).
Such a strategy may be appropriate for traders whose portfolio allows for the risk and reward profile offered by options positions.
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