Exxon Mobil Corp (NYSE:XOM) is poised to reap the benefits of a surge in oil prices during Q3, with futures prices for WTI oil for Nov. 2023 delivery significantly outpacing expectations. On June 23, these futures were trading at $69.23 per barrel, but today, they have surged to around $90, marking an impressive gain of 30%. This remarkable development could potentially drive XOM stock to new heights.
One compelling factor is the significant boost this brings to Exxon’s free cash flow (FCF) expectations for the quarter, which are anticipated to surpass those of Q2.
Exxon’s FCF Growth
During Q2, Exxon generated an impressive $5 billion in FCF, even after increasing its capital expenditure (capex) spending. Moreover, in the first half of 2023, Exxon managed to produce a total of $16.4 billion in FCF.
Admittedly, this figure was lower than the $27.74 billion achieved in the first half of the previous year. However, a portion of this variance can be attributed to a substantial one-time tax payment and elevated capex spending this year.
What’s worth noting is that, up until Q3, oil prices had been lower compared to the previous year. However, the substantial 30% spike in oil prices during the current quarter is set to bring about a substantial boost to Exxon’s FCF.
It’s plausible that analysts have not fully incorporated this development into their models yet, as their assessments tend to err on the side of caution.
Assuming that Exxon maintains relatively stable capex levels, it’s conceivable that the company might reach between half to 60% of the $22 billion in FCF achieved during the same quarter last year. This suggests that FCF for Q3 2023 could potentially range between $11 billion to $13 billion. Such a strong showing in Q3 could place Exxon on course to amass $30 billion in FCF for the first three quarters of 2023 and potentially reach up to $50 billion for the entire year.
Although this may not match the impressive $62.1 billion in FCF achieved in 2022, it remains a substantial figure. Moreover, it comfortably covers the $17 billion allocated by Exxon for share buybacks this year.
XOM Stock Price Target
This positive trajectory in FCF could potentially trigger a significant uptick in XOM. Let’s assume, for instance, that Exxon manages to generate $44 billion in FCF in 2023, doubling its first-half performance.
This implies that Exxon’s market capitalization could rise to $586.7 billion, up from its current $464 billion valuation. This calculation is derived by applying a 7.5% FCF yield, wherein dividing $44 billion by 7.5% yields a target market cap of $586.7 billion. Essentially, this is equivalent to multiplying the estimated $44 billion FCF by 13.3x (i.e., 1/0.075 = 13.3). Therefore, $44 billion x 13.3 equals $586.7 billion.
This scenario implies a potential surge of 26.4% in XOM, pushing it to $147.33 per share.
Additionally, Exxon is likely to announce a quarterly dividend increase in late October, building on its consistent track record of raising dividends annually over the past 24 years, as reported by Seeking Alpha. Such a move could further bolster XOM.
For instance, if the quarterly dividend increases to 94 cents, resulting in an annual payout of $3.76, and if the yield reaches 3.0%, XOM could potentially rise to $125, up from its current value of $116.92.
Generating Extra Income with Short Puts
Another avenue to consider is generating additional income through the sale of short out-of-the-money (OTM) puts with near-term expiration dates. For example, in our previous article, we discussed the sale of short put options with a strike price of $104, expiring on September 22. At that time, the premium was 78 cents, with the strike price over 4.7% below the spot price. Today, these puts are set to expire worthless, meaning the investor retained all the income, yielding an immediate 0.75% return, without any obligation to purchase the stock at $104.00.
Looking ahead, investors might contemplate selling short put options with a strike price of $111.00, expiring on October 13. This expiration period spans 21 days from the current date, with the strike price positioned 4.6% below the present value, rendering it out-of-the-money.
Furthermore, the premium obtained from selling these put options amounts to 68 cents, equating to an immediate yield of 0.61% over a span of just 3 weeks. If this strategy is repeated every 3 weeks throughout the year (17 times), the annualized expected return (ER) surpasses 10% (0.61% x 17 = 10.37%).
This underscores the potential for investors to generate attractive returns by selling short OTM puts while awaiting Exxon’s Q3 results. Additionally, with the company’s robust FCF and the prospect of a dividend hike, XOM may have further room for growth
In summary, Exxon’s future prospects appear promising, driven by its strengthening FCF and potential dividend increase. As these factors align, XOM stock could be on the brink of a notable resurgence, making it an appealing proposition for investors.
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