Exxon Mobil Stock: Don’t Follow Buffett Into Oil Now (NYSE:XOM) – Seeking Alpha

A few years ago my view was very Bearish on Exxon Mobil (NYSE:XOM) until the stock got so beaten down in the $30s that the only logical path forward was up. My clue to becoming actually Bullish on the energy giant was a change in policy towards less capex spending to drill for oil with a focus on producing positive cash flows. Now, my investment thesis suggests investors should start looking for an exit point with the stock up at $100 after 200% gains off the late 2020 lows.

Don’t Follow Buffett

Oil currently trades at elevated levels due to Russia’s invasion of Ukraine over 100 days ago along with some supply constraints due to covid supply alterations. In addition, President Biden’s decision to restrict oil drilling and pipeline construction, including the Keystone pipeline, hasn’t helped energy prices.

As discussed in the introduction, the time to buy energy stocks was a few years back. Warren Buffett loading up on Chevron Corp. (CVX) and Occidental Petroleum (OXY) after Russia started the first war in Europe since World War II sparks as backwards looking.

Over the last month, Berkshire Hathaway (BRK.B) has regularly purchased shares in Occidental after adding 121 million shares of Chevron during Q1’22. In fact, the last purchase of Occidental took place at $57 per share and investors could’ve bought shares below $10 in 2020. The stock actually trades near a 5-year high questioning the logic of now buying oil stocks during a war by one of the largest energy producers in the world.

So far, Buffett has done a solid job buying Occidental shares during May at prices in the $57 range with the stock now above $70. No one can deny those purchases of nearly 7 million shares were solid buys for the first month.

The big question is whether an investor should now follow Buffett into energy stocks after Occidental has surged over 20% above the last purchase price. Berkshire Hathaway already owns over 143 million shares and technically the firm run by Buffett didn’t aggressively purchase shares during May. Even if Buffett is still bullish on oil stocks, the signal isn’t very strong.

Another reason for caution is that Buffett famously sold the airlines like Delta Air Lines (DAL) and Wells Fargo (WFC) virtually at the covid induced lows. The famous contrarian investor now appears much more of a momentum investor dumping the airlines at the covid lows and chasing oil at war induced highs.

Delta was sold around $20 and quickly rallied to nearly $50 in the next year. In a similar manner, Wells Fargo was sold at $24 and made a run to $60 in slightly over a year. In both cases, Buffett missed out on 150% gains in short periods due to panic selling stocks. In my view, Buffett built Berkshire by investing in the banks during the financial crisis and making long term bets on beaten down and ignored profit machines in the decades prior.

Buying an energy stock after a 500% gain in a 20 month period smacks of the scenario where Buffett would’ve unloaded a stock in the past, not built up the position.

Weak Bull Case

A possible sign Exxon Mobil is overvalued occurs when an analyst writes a bullish research note about a stock, but the conclusion doesn’t offer a price target much above the current price. J.P. Morgan analyst Phil Gresh makes this case for us with the $108 price target on a bull call. Any bull case for a 4% upside says a lot.

In fact, the analyst community as a whole is struggling to justify the current price of Exxon Mobil. According to TipRanks, the average price target of $97.22 is 2% below the current price.

The average analyst EPS estimates tell another bearish thesis for the stock. The energy giant is expected to see earnings dip for the next 4 to 5 years, at least.

The stock trades at 15x 2025 EPS targets. A big key naturally is where oil and natural gas prices trade over the next few years. Hess (HES) outlined how the Stabroek block has billions of additional barrels of oil on top of the 11 billion barrels already discovered. The market does not lack for oil supplies, the market only lacks for the desire to drill and produce these supplies and the incentive exists with oil far above $100/bbl.

Possibly the best indication of why Exxon Mobil isn’t a buy now is the net payout yield. The energy giant has shifted from spending on capex to returning capital to shareholders, yet the net payout yield has dipped to only 4.1%.

The net payout yield combines the dividend yield with the net stock buyback yield to derive a valuation equation for the stock offering a better viewpoint of the valuation. The current dividend yield is a solid 3.6%, but the net payout yield is only 4.1% due to Exxon Mobil not actually repurchasing much in the way of shares considering the market cap has soared to $400 billion.

Remember, the company only increased the share buyback program to $30 billion through 2023. Exxon Mobil spending only $15 billion on buybacks annually doesn’t move the needle very much with the stock up at $100.

In addition, investors should question whether the energy giant will even use this authorization to repurchase shares up here knowing oil prices can’t remain this high. Russia is highly unlikely continue to wage this battle for Ukraine after the first 100 days have mostly failed to achieve any of the stated goals.

During Q1’22, Exxon Mobil only spent $2.1 billion repurchasing shares. The stock traded at just $60 when the quarter started and ended the quarter around $80. Exxon Mobil doesn’t get any more attractive to management up at $100 now.

On the Q1’22 earnings call, CEO Darren Woods reinforced the plan the spend $10 to $15 billion on share buybacks this year:

We returned $5.8 billion to shareholders, of which about 2/3 was in the form of dividends and the remainder, share repurchases, consistent with our previous program. We said during our Corporate Plan Update in December that we expect to repurchase $10 billion of our shares. This morning, we announced an increase to the program, up to $30 billion in total through 2023. This move reflects the confidence we have in our strategy, performance we are seeing across our businesses and the strength of our balance sheet.

Also, management was clear the goal is to build the cash balances up from $11 billion at the end of March to levels in the $20 to $30 billion range. The company is smart to focus on improving the balance sheet and not spending all the available cash on repurchasing shares at what is likely elevated oil prices.

Even worse, if Exxon Mobil follows through on the $15 billion annual buyback plan, the energy giant would spend over $4 billion per quarter for the rest of the year. The company would fall into the normal trap of spending more on buybacks as the stock price rises versus loading up over the last couple of years when stock prices were far, far lower.

Takeaway

The key investor takeaway is that now isn’t the time to follow Buffett into loading up on energy stocks. First, Buffett mostly bought Chevron and Occidental shares at lower prices. Second, Exxon Mobil has itself highlighted the valuation is already stretched by only coming up with a plan for repurchasing up to 3.8% of the outstanding shares.

Oil could definitely surge and send the stock much higher, but investors must use further gains to unload Exxon Mobil. The stock now trades at peak valuations.

Source: news.google.com