Gold price

Exxon Mobil: Why I Own The Gold Standard In Oil

Oct 1, 2022

Mobil Gas Station

RiverNorthPhotography/iStock Unreleased via Getty Images

There was something about that Exxon Mobil ( NYSE:XOM ) gas station when I was growing up. Its location, convenience store, and the red, white, and blue emblem, always made Exxon Mobil stand out amongst the other gas stations in my neighborhood. Now that I look back, it's not only about that gas station, but many Exxon Mobil stations had prime locations and seemed like the gold standard in my city, state, and other areas I lived and visited.

Thirty years later, it's all about Exxon Mobil's stock. I've been an Exxon investor for many years. While the company has had its ups and downs recently, now is still an excellent time to own Exxon Mobil shares. Inflation is surging, oil's supply-demand dynamic remains constructive, Russia's oil story is crashing, Exxon Mobil is cheap, and its stock price should go much higher.

If You Think Gas is High Now

The U.S. is releasing one million barrels per day from the reserve to help bring down gas prices. With the national average approaching $5 , many think that gas prices are high. However, I've been riding around Europe recently, and I'm seeing regular gas at around 2.50 Euros per liter now. So, that's about 10 Euros or roughly $11 per gallon and approximately $250 to fill up my SUV. Yes, you saw that right, about $250 to fill up my SUV with regular. So, if you think that gas prices are high in the U.S. now, they can probably go a lot higher, and Exxon Mobil should capitalize on the rise.

Inflation, Inflation, Inflation

One reason for the perpetual rising price at the pump is inflation. The Fed held interest rates down for so long that it lost its grip on inflation, and we're seeing some unintended consequences of that ultra-loose monetary policy now. Higher oil and gas prices directly result from high inflation, and we could continue seeing prices rise.

CPI

CPI (TradingEconomics.com )

We're now observing inflation above 8%, something we have not seen since the early 1980s. Also, there are no guarantees that the Fed can stop inflation cold in its tracks, and prices could continue rising from here. Inflation may remain more persistent and resilient than expected, and this phenomenon can continue supporting higher gas prices as we advance.

The Ukraine-Russia Conflict

Russia's brutal invasion of Ukraine is leading to tectonic shifts in the energy industry. The country's oil output is set to drop significantly due to the war and Western-led sanctions. The U.S. banned Russian oil imports in the early stages of the conflict, and now the EU is working on its embargo plan. Russia currently supplies 27% of the EU's imported oil and 40% of its gas. The EU pays approximately $430 billion a year in return. Due to the conflict, the block has agreed to cut back on Russian oil imports by about 90% by 2023. The U.K., which imports roughly 8% of its oil needs from Russia, said it would phase out the imports by the end of this year.

Now, that is a lot of oil that will stop flowing from Russia to the EU, U.K., U.S., and other countries. While OPEC+ has agreed to increase production, the move is not likely to relieve price pressure in the near term. Russia is a top-three oil producer with over 11 million barrels a day . Import bans and embargoes on Russian oil should continue to create imbalances in the global oil supply-demand dynamic. Moreover, there are geopolitical and uncertainty factors to consider. With the Russian-Ukraine conflict likely to drag out for months and possibly years even, oil prices may continue to remain elevated and could potentially move substantially higher as we advance.

Additionally, Russia should lose power and influence in the energy industry due to sanctions and alienation. Leading companies like Exxon Mobil and other Western juggernauts should fill the gaps in Europe and other areas, leading to market share gains, higher revenues, more profits, and higher stock prices.

Exxon Mobile - Still Very Cheap

XOM

XOM (StockCharts.com)

Exxon Mobil has doubled from its low of $50 last year, but the stock is still very cheap. Exxon is trading at just 9.7 times this year's EPS estimates, despite the meteoric rise. However, consensus analysts' estimates point to a decline in EPS next year, and consensus expectations are for just around $8.57 in EPS in 2024.

EPS Estimates

EPS estimates

EPS estimates (SeekingAlpha.com)

This dynamic implies that many analysts expect oil prices to peak this year and decline into 2023 and 2024. However, due to high inflation, the Russia situation, and other factors, we may see oil prices remain elevated for longer, and we may even see substantially higher oil prices as we advance.

EPS Revisions

EPS revisions

EPS revisions (SeekingAlpha.com)

We see a robust trend of higher earnings revisions. 2022 EPS estimates have been raised by 75-100% relative to six months ago. This dynamic implies that future EPS estimates can also rise significantly, despite the current depressed forecasts by the consensus crowd. After all, a year ago, relatively few analysts were expecting $100-120 today, and few believe that oil will remain elevated for long. I saw the high prices coming and thought we would be around $100 by 2022.

Moreover, we may see oil prices go to $150 or higher before this year closes. Therefore, oil could be considerably higher one year from now. Also, while many analysts think Exxon's revenues and earnings will dip lower in 2023 and 2024, we may continue seeing inflation and higher oil prices persist for much longer than expected. Therefore, Exxon Mobil and other top energy companies could continue seeing revenues and EPS increases followed by multiple expansion and substantially higher stock prices.

Exxon Is Not Alone

While Exxon Mobil is essentially the gold standard in the oil industry, other high-quality companies exist. The oil/energy segment has been an intricate part of the All-Weather Portfolio for a long time, and some of my favorite holdings include:

1. Exxon Mobil: 52-week change - 63%, EPS (2022 est.) - $10.22, P/E ratio (2022) - 9.7, Dividend - 3.55%.

2. Valero ( VLO ): 52-week change - 62%, EPS (2022 est.) - $14.45, P/E ratio (2022) - 9.3, Dividend - 3%.

3. Occidental Petroleum ( OXY ): 52-week change - 140%, EPS (2022 est.) - $10.15, P/E ratio (2022) - 6.9, Dividend - 0.74%.

4. Schlumberger ( SLB ): 52-week change - 30%, EPS (2022 est.) - $1.86, P/E ratio (2022) - 25, Dividend - 1.5%.

Note: Schlumberger has a high growth tailwind, so the stock trades at a relatively high multiple.

5. Chevron ( CVX ): 52-week change - 65%, EPS (2022 est.) - $16.53, P/E ratio (2022) - 10.5, Dividend - 3.2%.

6. Marathon Oil ( MRO ): 52-week change - 130%, EPS (2022 est.) - $4.76, P/E ratio (2022) - 6.65, Dividend - 0.82%.

7. Apache ( APA ): 52-week change - 108%, EPS (2022 est.) - $10.13, P/E ratio (2022) - 4.7, Dividend - 1%.

While Exxon is the leader in the oil/energy space, there are many other excellent companies. We've seen stellar 100% plus returns from several of the names on my list, and the outperformance should continue as oil and gas prices continue to rise—moreover, several stocks on my list trade at remarkably low P/E multiples (Apache 4.7). Thus, there is a high probability of more upside in many top oil and energy names. The market may realize that inflation and higher energy prices will persist for longer than expected, leading to multiple expansion and higher prices for Exxon and other top oil stocks. Therefore, I plan to expand my All-Weather Portfolio's energy/oil segment from 9% to 12-15% of portfolio holdings within the next several days. Apache, Marathon, and Chevron are the top stocks on my buy list.

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