Oil prices experienced a rise today, driven by optimistic sentiment following the U.S. debt ceiling deal. Market participants also considered the possibility of production cuts by the OPEC+ alliance over the weekend, which could further support prices.

Despite the recent market optimism, Exxon Mobil Corporation (XOM) faces challenges that cast doubt on its long-term prospects. In this article, I will explore reasons why investors should exercise caution and wait for a more favorable entry point in this stock.

Earlier this week, XOM’s CEO, Darren Woods, announced plans to double the oil production from the company’s U.S. shale holdings within five years, leveraging new technologies. However, this comes after a setback in December when the company postponed its goal of pumping up to 1 million barrels per day in the Permian Basin, the largest U.S. shale field.

XOM has declined 13.7% over the past month to close the last trading session at $103.36. It has also tumbled 7.4% year-to-date and 8.2% over the past six months.

Here’s what could shape XOM’s performance in the near term:

Mixed Financials

During the fiscal first quarter that ended March 31, 2022, XOM’s sales and operating revenue declined 4.7% year-over-year to $83.64 billion. Its total revenue and other income decreased 4.3% year-over-year to $86.56 billion.

Also, the company’s non-GAAP net earnings and net earnings per share rose 31.5% and 36.7% to $11.62 billion or $2.13 per share, respectively.

Healthy Profitability

XOM’s trailing-12-month levered FCF margin of 11.31% is 91.4% higher than the industry average of 5.91%. Its trailing-12-month asset turnover ratio of 1.10x is 68.4% higher than the 0.65x industry average.

Additionally, its trailing-12-month ROCE, ROTC, and ROTA of 33.54%, 20.39%, and 16.70% are higher than the industry averages of 23.95%, 11.34%, and 8.95%, respectively.

Stretched Valuations

XOM’s trailing-12-month P/B multiple of 2.02 is 51% higher than the industry average of 1.34x. Its trailing-12-month EV/EBITDA of 5.14x is 7.1% higher than the industry average of 4.80x, while its trailing-12-month Price/Cash flow of 6.74x is 72.8% higher than the industry average of 3.90x.

Unfavorable Analyst Estimates

Analysts expect XOM’s revenue for the fiscal second quarter ending June 2023 to amount to $103.60 billion, indicating a decrease of 10.5% from the prior-year quarter. The company’s EPS for the same quarter is expected to decline 44.5% year-over-year to $2.30.

Moreover, its revenue is expected to fall 6.7% year-over-year to $386.06 billion in the current fiscal year ending December 2023. Its EPS estimate of $9.96 for the same year indicates a 29.2% decline compared to the prior year.

POWR Ratings Reflect Uncertainty

XOM has a rating of C, translating to a Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. The stock has a C grade for Growth, in sync with its mixed financial performance in the previous quarter. Its C grade in Stability is justified by its 60-month beta of 1.08.

XOM is ranked #34 among 93 stocks in the D-rated Energy – Oil & Gas industry.

Click here to access XOM’s Quality, Value, Momentum and Sentiment grades.

Bottom Line

While XOM introduced a technology development program to compensate for the delay of its recent goal of pumping up to 1 million barrels per day in the Permian Basin, the largest U.S. shale field, doubts linger about the company’s ability to deliver on its promises.

The company’s setbacks in shale oil production, mixed financials, stretched valuations, and unfavorable analyst estimates all contribute to a negative outlook.

Although the recent market optimism may provide a glimmer of hope, the hurdles ahead suggest that a patient approach is warranted. So, it could be wise for investors to exercise caution and wait for a better entry point.

Stocks to Consider Instead of Exxon Mobil Corporation (XOM)

Unfortunately, the odds of XOM outperforming in the weeks and months ahead are significantly compromised. However, many good stocks in the Energy- Oil and Gas industry have impressive POWR Ratings. So, consider these three A-rated (Strong Buy) and B-rated (Buy) stocks instead:

Cheniere Energy Inc. (LNG)

Weatherford International PLC (WFRD)

Unit Corp. (UNTC)

What To Do Next?

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XOM shares were trading at $104.79 per share on Friday morning, up $1.43 (+1.38%). Year-to-date, XOM has declined -3.43%, versus a 11.89% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...

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