East Exxon Mobil (NYSE: XOM) come back from the dead? After reading comments last week that the party was over and oil investors were screwed, we saw the tide turn once again as oil prices rallied back to $113 a barrel. With him, stocks also return. It’s not a “dead cat bounce” because the fundamental picture hasn’t changed yet. Until we see an increase in production or a drop in demand, there’s no reason to believe the party is over. While the market remains volatile, if you liked Exxon at $80 oil, it’s even more attractive now given the amount of money the company is bringing in. The longer we see high prices, the better. for shareholders. Exxon is run very conservatively, so it will take time for management to reward shareholders, but if this continues, and I believe it will, they will be rewarded generously in due course.
What’s next for oil and Exxon?
Now that people are finally paying attention to oil prices after many of us have been talking bullish fundamentals for over a year, we are seeing some interesting yo-yo action in both the oil price and the stocks like Exxon. So what’s the next step? Well, like it or not… continued volatility. As I write this article, oil is currently trading at $113 a barrel. In my most recent article, I explained what $110 of oil meant to Exxon. But let me dive into what could be next, when it comes to Exxon in particular.
The current buzzword in the industry is “Windfall Profits Tax”. Which is funny to me. Governments around the world seem to agree that we need to increase production to help mitigate high oil prices and therefore high gasoline prices, and they’re not wrong. The problem is how they do it. We have seen what appears to be attack after attack on the oil industry by canceling pipelines, limiting drilling in certain areas, taxing carbon, among other policies. Yet now governments want those oil companies they have handcuffed for the past few years to help them? It’s quite comical. So when CEOs say they won’t increase production, instead of looking to potentially increase investment, manage pipelines, and make life easier for these companies to increase production, we’re going to impose another tax on them ? Something is wrong here.
Why is this counterproductive? Well, a new tax will force companies to reduce their production to avoid paying said tax. Warren proposed a tax on every barrel of oil produced or imported by big business, equal to half the difference between the current price of oil and the 2015-19 average.. This tax would take 50% of the profits of oil companies and return them to low-income taxpayers while keeping gasoline prices at or above their current levels. Now, I don’t think this bill will pass, but we might see some weakness as the idea rolls around. If that does happen, US stocks will be tough to hold, which is good news for the Canadian mid-cap companies I own. But, if the United States enacts some sort of tax, it’s likely the Canadian government will follow suit with something similar.
Regarding the price of oil, your guess is as good as mine. I think we remain high and Exxon will continue to take profits as its breakeven price heads in the opposite direction. We are hearing calls from Citi for oil to be cut 50% by the end of the year. Meanwhile, Rystad claims $240 worth of oil. Who to trust? I’m not even sure. The Russian ride really takes any sort of rating for a loop. Oil prices are hard to understand when everyone is playing well. Take out a global oil giant and you will understand why we have differences of opinion among analysts. I personally think we hover between $100 and $120 for most of the year. Assuming of course that Russia remains sanctioned for months to come. It is impossible for them not to sell oil, given that about half of Russia’s income comes from oil. The question is where is it going and how fast. We know that global demand will continue to rise, so where will the supply come from to offset that? We are already seeing that reserves are being depleted during a period when they are usually accumulating. What will “Driving Season” bring to North America as we head into Spring/Summer? Only time will tell. As my Econ 101 teacher once mentioned…”The best cure for high prices is high prices”. It’s going to be a very interesting Q2.
What does the dividend look like?
If 2020 has taught us anything, you can count on Exxon’s death, taxes and dividend. Against all odds, the company managed to maintain its dividend. Even at questionable times, like 2020 when they went into debt to help maintain the dividend. Luckily for Exxon, all went well and net debt in 2021 was lower than it was in 2019.
In 2019, we saw the EBITDA to net debt leverage ratio end at 1.21x, which was the highest since my data (2005). In 2020, this figure increased to 4.94x, and by the end of 2021, it was down to 0.78x. Truly an amazing turnaround. For reference, EBITDA from 2019 to 2021 was $36.2 billion, $12.8 billion and $52.8 billion respectively. The turnaround we have seen is quite remarkable. Analysts currently expect EBITDA to be around $71.9 billion this year, but if we continue to see oil prices rise well beyond $100, I think it will move closer to $73. billions of dollars. What does this mean for the dividend? Unfortunately, probably not many. With the stock currently yielding around 4.3%, it appears the company is comfortable with the expected increases. Shareholders were a bit disappointed that nothing major was announced regarding the dividend given where oil prices have been and continue to be.
That said, I understand the caution. We are still only 2.5 months away from a 12 month period. There are a lot of things that could change. As we see the average first quarter oil price increasing day by day, I have a feeling we could see an increase in June, as we did every year before Covid entered our lives. If we continue to see high oil prices, we could get some quarterly increases, but I won’t hold my breath. Exxon likes to look long term (5 years) and operates to be there for the long haul, which is a good thing in the end. I understand the frustration as mid-cap companies increase dividends and redemptions, which seems almost daily given the increase in cash flow. All I can stress is patience. The dividend is in good shape, and I expect Exxon to do the right thing and properly reward shareholders one way or another if we continue to see high commodity prices.
What does the price say?
What a crazy week it’s been. Price action has been everywhere. We saw the stock touch $91.50, and in 7 days it was down 17% below $76.50. As mentioned, Oil is rallying to $115, and Exxon is following. Currently trading at $82.40, where are we headed? You always have to prepare for both sides. While I remain bullish, let’s dive into the key levels to look for going forward.
Starting with the upside targets, we first need to clear $83.00 again. About a month ago I explained how important the $83.00 mark was. Looking below, we can see how this level has played out over the past few weeks. We saw our first touch in early February before the bull headed lower. Then on March 4, we broke through the mark, which was a very bullish signal. The problem was the speed at which we did it. The stock ran 20% in 8 days. We dipped and hovered around $83.00 before falling back. We look like we can see another quick test of $83.00, and a pause here is extremely important. A break sets us up for another run at the recent top, and eventually for $95.00, as shown below.
As for the bearish case, a rejection at $83.00 is great news. There is a potential head and shoulders play here, which is a bearish setup. The neckline is just around $83.00 and the base at $75.00. If we reject here, we could very easily see another test of $75.00. While it’s not all bad news, it’s not what shareholders want to hear. $75.00 has been a level I have written about many times, and it has held on the recent pullback. We can keep trusting it until it breaks. If it breaks, we are going to see a test of the 200 day moving average, which in the long run is very bullish.
Looking below, we can see that we haven’t touched the moving average since the low in late December. The moving average is currently at 20% of our current position, but lines up nicely with the $66.20 support level. If I had a position, I would have half my position locked in at $75.00 and the rest at $66.20. The ideal plan would be to buy the halfback by bouncing off the 200-day moving average or $66.20, wherever it occurs. As the days go by, the moving average will also move higher, which is a good thing because it means the support rises and then $66.20 becomes the last line of defense.
It’s really easy to get lost in the narrative and only see one side of the trade, but it’s important to chart both angles and come up with a plan. You never know what’s going to happen for sure and being caught off guard sucks. The oil market is going to remain volatile, which only means that it’s even more important to have stops in place. Protect your capital and fear buying back later. In the end, wins are wins.
As you can see, the party is not over. My current price target remains at $95 for Exxon. Will it happen overnight? No. And it better not be. A slow build is a long-lasting build. I believe this oil bull market is just getting started and we have a few years of high prices to deal with as production tries to keep up with demand. The war in Ukraine hastened the process, but it showed how bad the fundamental picture was, something many either failed to see or chose to ignore. If you feel the pain at the pump, you might as well recoup some of that pain in the form of dividends from a producer like Exxon. The dividend will continue to rise, and shareholders may be surprised if we continue to see prices above $100 for an extended period. The party is on. This is not a dead cat bounce.