Over the 12 months the price of crude oil has doubled and the share price of Exxon Mobil (NYSE:XOM) is up more than 80%. And while that’s three times the gain in the S&P 500 index, XOM stock is still a cheap.
At $258 billion, the market capitalization offers a premium of just 20% over this year’s expected revenue of $214 billion. XOM stock holders are getting paid a dividend that’s still yielding 5.65%.
Exxon Mobil’s focus on oil exploration, with proven reserves in Texas’ Permian Basin and off South America, seems to offer a bright future. But they’re not lighting cigars with dollar bills in Irving, Texas. They’re opening the last bottle of booze.
Oil is Expensive
Oil has always been a boom-and-bust business. Business was great in 2014. Oil was at $100 a barrel. New fields were being exploited in Texas and Colorado. Fracking promised to renew old fields.
By 2020, a lot of these companies had gone bust. Others were “dead men drilling,” pumping oil for their creditors rather than shareholders. International rivals like Total (NYSE:TTE), Royal Dutch Shell (NYSE:RDS.A) and BP (NYSE:BP) pulled back in the name of the environment.
Exxon Mobil did not. It was an aggressive asset acquirer in 2020. Debt levels have more than doubled from 2018. Exxon Mobil recently announced it will put $20 billion-25 billion into capital spending per year through 2025. That’s as much as Facebook (NASDAQ:FB).
But fossil fuels are no longer cheap energy. Wind farms can deliver energy for half the price of coal in some areas. Solar panels can deliver electricity for a fraction of the cost of fossil fuels.
That may not help today, when you’re trying to fill your tank with gasoline or keep the home warm with natural gas. But renewables are the turtle racing the hare. Demand taken out by a wind farm or solar panel is taken out permanently. Demand for gasoline taken out by a Tesla (NASDAQ:TSLA) is taken out forever.
Make Money Now
During the last decade’s energy boom, companies borrowed heavily assuming the good times would last.
That’s not the attitude today. Today it’s about short-term profits, and rewarding shareholders.
As our Ian Bezek wrote recently that Exxon Mobil now sports one of the best 6% dividends around. The firm lost $22.4 billion in 2020. In the second quarter of 2021, it earned $4.7 billion, or $1.10 per share.. For the third quarter, analysts expect earnings of $1.51 a share. That would be almost $6.5 billion.
Despite that great news, analysts are not pounding the table for XOM stock. The 10 analysts on the stock as tracked by TipRanks have an average rating of “hold.” Three are saying “buy,” but two are saying “sell.” Their average price target is less than 10% above where it’s now trading.
Compare that to other fat yield stocks. AT&T (NYSE:T) currently delivers a yield of 8.18%. That’s a known yield trap. The dividend will fall once it unloads Warner Discovery. But analysts are more optimistic on it than on Exxon Mobil. The same is true for International Business Machines (NYSE:IBM), which yields 4.66%.
The Bottom Line on XOM Stock
There are two reasons to buy stock. You want the price to go up, or you want the dividend income. XOM stock has delivered both in 2021. But there’s a sell-by date on the growth. As renewable supplies slowly increase, Exxon Mobil’s market is permanently cut.
The short-term outlook remains great. You can speculate that will continue. You might make some money. You can also grab a fat dividend that may increase. At a minimum, it looks safe for another year or two.
But this is the last dance. It’s your last chance for love in the oil patch. Next time the clock strikes midnight on Exxon Mobil, this stock turns into a pumpkin.
On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.