Wall Street Is —Finally—Warming To Exxon Mobil

For a long time recommending Exxon XOM Mobil stock felt like being the Maytag repairman.  Finally, this week, the Street has begun to figure out the extraordinary value in XOM stock. As I noted in this Forbes article, the real growth at this company is hidden by the market’s laser -focus on commodity price levels.  So, yesterday, Goldman GS Sachs upgraded Exxon to Buy for the first time in four years, with a price target of $52.  Wells Fargo WFC had upgraded XOM earlier in the week.


While the GS report, available in partial form here for those without access to institutional research, has some weird gymnastics around Exxon and the potential for a “variable dividend.” let me restate my case, as I did in this Forbes article.  Exxon has no need to cut its dividend.  If this happens CEO Darren Woods will lose his job, and that is not a choice any chief executive ever makes willingly.  

Goldman did increase its earnings estimates in its upgrade note, and. as usual, the hard numbers are key.  Goldman’s estimates and Goldman’s view of Street consensus are as follows


GS Consensus

2020 $2.70 $1.57


2021 $4.18 $3.14

2022 $3.82 $3.72

Goldman is well above consensus for the fourth quarter, and nearly a full dollar above consensus for 2021 EPS.  If Exxon can earn $4.18 in 2021 then a) Exxon will have scope to raise (slightly) its dividend, not be forced to lower it and b)  XOM stock would benefit from the flood of goodwill that always accompanies rising earnings estimates.  

There is no mathematical justification for a $43 XOM share price if the company really can earn $4.18 next year.  However, as the Goldman report points out, the company has an uneven record of beating consensus estimates, with only a 55% rate of beating consensus over the past five years.  That is an indication of how poorly the current generation of analysts forecasts earnings, not anything to do with Exxon’s earnings performance.  As I noted in my Forbes piece, Exxon has been solidly cash flow positive even in the throes of the Covid Crisis, and a better economic outlook combined with a much smaller capex budget implies that Exxon can produce excess cash flow (after dividend and capex) in 2021, not just positive operating cash flow (before capex.)  

Exxon is cheap, but, as always, surrounded by noise.  A Google GOOG search on Exxon will return a series of weird, incredibly one-sided CNN articles on “shareholder turmoil” at XOM.  If you are smart enough to make it this far in my article, you cannot possibly be dumb enough to get your financial news from CNN.  After months of blatantly twisting facts and engaging in ad hominem, fallacious arguments against our current President, CNN has apparently turned its mendacity machine against hydrocarbon companies.  Ignore them.  Wall Street certainly does.  There is no turmoil at Exxon.  Management simply needs to execute better.  

So, that’s what we will see as we move into 2021.  Exxon shares should be bolstered by a tide of rising earnings estimates (if Goldman’s analysis is correct.)  To say XOM stock is under-owned by the “woke,” ESG-loving drones who pontificate on the nation’s second-most watched financial news network (CNBC) would be an understatement.  

It’s all about execution for Exxon now.  Woods has a terrible record as CEO—as measured by XOM share price, which is the only metric that really matters—but Wall  Street is finding value in his giant.  With huge recent discoveries in the Caribbean—offshore Guyana and Suriname—and a massive liquefied natural gas operation in Papua New Guinea (PNG,) Exxon is incredibly well-positioned to supply hydrocarbons to the world’s emerging economies without upsetting “woke’ anti-hydrocarbon/anti-progress “activist” governments in the West.  This needs to show up in the bottom line, and, as Goldman correctly notes, it will begin to in 2021.  

Buy Exxon shares to play the tremendous tailwind for earnings. If you already own them, continue to hold them for the support that earnings tailwind will provide to the already ridiculous 8.0% yield.

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