Exxon Mobil (NYSE:XOM), the energy industry behemoth, has experienced a roller-coaster ride since achieving a closing high of $120.20 in late September. This turbulence is attributed to various factors, including a sharp decline in crude oil prices, concerns surrounding Exxon’s acquisition of Pioneer Natural Resources (NYSE:PXD) for $60 billion, and escalating geopolitical tensions in the Middle East. Consequently, XOM witnessed a rapid 13% drop from its peak to trough earlier this month. Although the shares have rebounded from their recent lows of around $104, they still remain approximately 7% below their highs less than a month ago.
Leaving aside the day-to-day correlation of XOM with crude oil futures (CLX23), investors tend to be cautious about substantial acquisitions, like the one with PXD, as integrating companies and realizing expected synergies or cost efficiencies can be challenging. Moreover, such acquisitions often entail debt financing, resulting in increased interest costs and decreased profit margins. Complicating matters further, the Federal Reserve has recently accelerated interest rate hikes to combat inflation, placing the benchmark lending rate at a multi-decade high. Given this backdrop, the prospect of a major acquisition has understandably made Exxon investors nervous, especially with the simultaneous oil price pullback driven by macroeconomic concerns.
Considering these factors, let’s evaluate the current investment prospects for XOM.
How Will the Acquisition Benefit Exxon Mobil?
Upon the successful completion of the acquisition of Pioneer Natural Resources (NYSE:PXD), Exxon Mobil stands to significantly boost its daily oil production. In fact, it is expected that Exxon Mobil’s oil production will surpass that of its closest competitor by a remarkable 50%. The ability to swiftly adjust oil production in response to the rapid fluctuations in oil prices is a considerable advantage. Previously, some energy companies expressed doubts about the consistency of oil well production in the Permian Basin. This enabled smaller players like Pioneer to scale up production rapidly, and the Permian Basin has now become one of the most prolific basins in the U.S.
Exxon Mobil anticipates that this deal will transform its upstream portfolio, more than doubling its presence in the Permian Basin while creating a substantial inventory of undeveloped resources in the U.S. The company aims to achieve double-digit returns by efficiently recovering these resources. According to Exxon Mobil, the cost of supply from Pioneer’s assets is expected to be less than $35 per barrel, enabling the company to report significant profits when oil prices remain elevated. Exxon Mobil has also emphasized that short-cycle barrels will account for 40% of upstream volumes by 2027, positioning the combined entity to respond rapidly to changes in demand and capture both price and volume upside.
Expectations for Exxon’s Earnings
With a market capitalization of $440.15 billion, Exxon Mobil is among the world’s largest companies. Its diversified earnings base allows it to pay an annual dividend of $3.64 per share, indicating a yield of 3.31%. Over the last 30 years, these payouts have grown at an annual rate of 5.5%, reflecting the resilience of its business model. Recently, Exxon Mobil stated that higher oil prices should lead to an increase of $900 million in its upstream earnings in the third quarter of 2023. The company expects total operating profits for the September quarter to range between $8.3 billion and $11.4 billion, surpassing estimates of $9.2 billion. In the same period a year ago, Exxon Mobil reported profits of $19.7 billion, driven by higher oil prices and improved profit margins in its refining business. In contrast, during the second quarter, its adjusted earnings stood at $7.9 billion. The 30% rise in Brent oil prices to $97 per barrel in the third quarter should enable Exxon Mobil to increase its profits by over $1 billion. Additionally, higher natural gas prices are expected to contribute between $200 million and $600 million in quarterly profits for the company in the third quarter, offsetting weaker performance in the chemicals segment.
Exxon Mobil is scheduled to release its third-quarter earnings on October 27.
Analysts Expectations for Exxon Mobil Stock
Analysts generally appear optimistic about the Pioneer acquisition, with most expecting that potential Federal Trade Commission (FTC) scrutiny will ultimately result in the merger’s approval. Truist analysts went as far as upgrading the stock to “hold” from “buy” upon the acquisition news and raised XOM’s price target to $131 from $110. They emphasized that while the acquisition might not yield significant near-term benefits, it could be more substantial in the future. Truist analysts also highlighted the pro-forma company’s potential for premium earnings multiples and strong cash flow yield, given its scale and expected productivity. With forward earnings multiple of 12x, XOM appears to be reasonably valued at current levels.
Of the 17 analysts covering Exxon Mobil, eight recommend “strong buy,” and nine recommend “hold.” Wall Street has a 12-month average price target of $127.69, indicating a potential 15% upside from the current trading price.
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