Shares of Exxon Mobil (NYSE:XOM) are up over 23% since closing at a price of $31.45 on March 23. For XOM stock, that was the lowest price per share the company has logged since the merger of Exxon and Mobil in 1999.
Some of the gain in XOM stock is due to the $2 trillion stimulus package that includes targeted funds (in the billions) for specific industries. The Trump administration is also eager for the United States to maintain its energy independence. And that means it needs to protect the shale industry.
Reports are circulating that our government is entering into direct negotiations with Saudi Arabia for an end to the current price war. If that’s true, then it’s likely that oil may be close to a bottom.
But that doesn’t mean it will be climbing to $50 per barrel anytime soon. Many analysts are looking at a price of around $30 per barrel. A lot of things have to go right for that to happen. The most important is that there is a relatively quick resolution to the economic shutdown being caused by the coronavirus.
Exxon Mobil Has Earned Its Quality Reputation
Much is being made about the security of Exxon Mobil’s dividend. And at first glance, it’s not hard to see why. The company is facing a severe loss of revenue and one logical way to balance the books would be to cut the dividend.
But a lot of the XOM bears are forgetting that Exxon Mobil has one of the strongest balance sheets in the United States. Until 2014 (the last oil crash), the company maintained a AAA credit rating. And despite a recent downgrade, the company still holds a AA credit rating.
In practical terms, it means that Exxon Mobil can afford to take on debt to get favorable rates. For example, in 2019, the company issued $1.25 billion in 10-year bonds at a 2.44% coupon rate. For bankers looking ruefully at current interest rates for treasuries, Exxon Mobil is an extremely low default risk.
And, the company has over $20 billion in annual debt, but over a 15-times interest coverage ratio. So, let’s say the company added an additional $20 billion of debt. They could still have an interest coverage ratio of around 8x.
And the company has shown the willingness and ability to cut capital spending when needed. Let’s look at a scenario where the price of Brent crude stayed around $30 through 2026. Exxon Mobil would see its free cash flow drop by about $300 billion.
If oil prices don’t recover, this won’t be an easy task. And the stock would be unlikely to grow. But the dividend should be fine.
History Favors Exxon Mobil
In volatile times like this, it can be hard to find a solid reference point. Our current economic crisis has many unknowns.
However, I did find one historical reference that makes me bullish on the stock. On Sep. 10, 2001, XOM stock was trading at $41.24. By Sep. 21, the stock closed at $35.79. It took until March of the following year for Exxon Mobil to make up that gain.
On March 9 of this year, XOM stock closed at $41.86. It hit a bottom of $31.45 on March 23. That drop of nearly 25% was almost double the drop of the stock after the events of 9/11. However, you’ll remember that the market stopped trading for several days after the attacks for security reasons.
It’s not hard to theorize that an oil stock like XOM would have fallen much further and much faster had the trading floor been open.
This brings us back to the current crisis. The supply glut is a messy, geopolitical issue that will be dealt with diplomatically. However, the demand issue is much easier to figure out. Once Americans have the all clear, demand will return. The only questions are how fast and how far?
Could we see XOM stock back in the $40 range by the fall? It’s possible. But it’s also possible that the coronavirus will present our economy with additional and yet unknown challenges that could serve as an anchor for the stock.
Proceed with Caution on XOM Stock
I believe that XOM will be able to stave off this crisis. I don’t know how long there will be demand disruption. But I don’t feel I’m being naive in believing that the coronavirus is not an existential threat to our economy. Demand is curtailed because the consumer is sequestered by order, not by choice.
Yes, there will likely be awful unemployment numbers for the next several weeks. However, many Americans will continue to receive paychecks. And you’d better believe that when Americans can travel either by car, bus, or plane they will.
The fair question is when that will be, and I don’t know. That’s why I think you don’t want to get ahead of yourself on XOM stock. Ultimately, Exxon Mobil and all oil producers need oil to get back up to around $50 a barrel. And that will take some time.
But in the meantime, I believe fears of a dividend cut are overblown. If you’re expecting growth from XOM stock, you may have missed the boat. But if you’re willing to ride out the volatility while capturing a nice dividend, you can grab a quality stock at a historic discount.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
