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ExxonMobil: Buy, Sell, or Hold?

Motley Fool - Sun Apr 28, 2:12AM CDT

Energy stocks have gone on a tear over the past two months, and ExxonMobil(NYSE: XOM) is one company benefiting. Oil prices have risen amid geopolitical conflicts in the Middle East, but is it too late to buy the stock? Here are some things you'll want to consider if you're buying ExxonMobil today.

ExxonMobil's integrated business model and its growing dividend payout

ExxonMobil is one of the world's largest oil and gas companies. It has a long history of strong capital management and has managed to reward investors across the heavily cyclical energy business, as evidenced by its 41-year history of raising its dividend payout.

Its steady performance is possible because of its integrated business model across the energy supply chain. Oil and gas companies typically operate in the upstream, midstream, and downstream segments. Upstream activities, also known as exploration and production, include drilling, exploration, and extraction. Midstream activities include processing, storing, and transporting oil and gas, while downstream operations include refining crude oil into gasoline, natural gas liquids, or other energy sources.

Two workers are at a oil refinery.

Image source: Getty Images.

Integrated oil companies can weather oil and gas price fluctuations better than peers focusing only on one activity. That's because these activities are highly dependent on market conditions. For example, upstream activities benefit from higher crude oil and gas prices. However, if the price of oil plummets, so do an upstream operator's profits.

That's where the midstream and downstream business comes into play. Transporting and refining oil and gas can be a more reliable source of income and balance out fluctuations in the price of oil and gas. That's because its refinery business benefits from lower oil prices because of lower input costs. Many of the largest oil and gas companies are integrated for this reason, making them dependable dividend stocks.

Robust cash flows and an improving balance sheet

ExxonMobil has benefited from high oil prices over the past few years, which has enabled it to shore up its balance sheet, pay off debt, and pay shareholders through dividends and stock buybacks.

XOM Total Long Term Debt (Quarterly) Chart

XOM Total Long Term Debt (Quarterly) data by YCharts

Over the last two years, ExxonMobil has generated a staggering $98 billion in free cash flow. The company has used a big chunk of this to pay down long-term debt, which ballooned to nearly $70 billion during the pandemic. The company has paid down nearly half of this and has around $38 billion in long-term debt today.

Not only that, but it has also raised its dividend payout for the 41st consecutive year. It raised its dividend payout by 4.4% and yields investors over 3% annually. It has also increased its share buybacks substantially. In 2023, the oil and gas giant repurchased $17.4 billion in shares and plans to ramp that up to $20 billion once its merger with Pioneer Natural Resources is completed.

This could be a tailwind for ExxonMobil's business

Investing in the oil and gas industry isn't without risks. Despite the integrated business model, these companies can be vulnerable to swings in commodity prices. Supply and demand shocks can help and hurt these companies, so they could experience more volatility than the broader market. For example, oil prices plummeted in 2020 amid the pandemic-induced economic slowdown, and many of these stocks took almost a year to recover.

However, the outlook today appears to favor oil and gas giants. Occidental Petroleum CEO Vicki Hollub told CNBC in an interview that the world is failing to replace crude reserves fast enough. The Strategic Petroleum Reserve (SPR) is an emergency supply of crude oil maintained by the United States Department of Energy. In March 2022, the Biden administration began releasing reserves to cap oil prices, which were rising following Russia's invasion of Ukraine. The SPR is down 38% since February 2022 and has reached its lowest level in 40 years.

US Crude Oil in the Strategic Petroleum Reserve Stocks Chart

US Crude Oil in the Strategic Petroleum Reserve Stocks data by YCharts

In addition, according to the hedge fund Citadel, as reported by The Financial Times, oil markets are set to become "extremely tight" in the second half of the year. The highly successful hedge fund said that OPEC+, which has cut production to boost global oil prices over the past year and a half, has "regained control" of the oil markets. Tight supplies and strong demand from countries replenishing crude reserves could keep a floor on oil over the next few years.

Buy, sell, or hold ExxonMobil?

ExxonMobil has several things going for it: an improving financial position, capital return to shareholders through growing dividends and share repurchases, and ongoing tightness in the oil and gas markets. Given this backdrop, I think ExxonMobil is a solid stock to buy today and hold for the long haul.

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Courtney Carlsen has positions in ExxonMobil and Occidental Petroleum. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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