2020 was a dismal year for energy companies like ExxonMobil (XOM) as crude oil prices plummeted during the year. However, things are looking up for the battered energy sector in 2021.
2020 was among the worst year for oil and gas companies. The WTI (West Texas Intermediate) contract turned briefly negative in April. It was the first time that energy prices had turned negative in history. However, it showcased the troubles faced by energy companies. Energy stocks like ExxonMobil were among the worst-performers of 2020.
ExxonMobil lowered dividend in 2020
While crude oil demand plummeted during the COVID-19 pandemic, US shale producers could not immediately cut their production. This led to a glut of crude oil in the market and producers were willing to offer money to take the oil from the fields as is reflected in the WTI contract turning negative. The fall in crude oil prices prompted companies like ExxonMobil to lower their dividends in a bid to control their cash outflows.
ExxonMobil stock bounced back as energy prices rose
However, WTI bounced back from the lows amid the production discipline showed by the OPEC+. ExxonMobil stock fell to a 52-week low of $30.11 last year amid the plunge in crude oil prices. It hit its 52-week high of $71.36 before the pandemic. While the stock has recovered almost 50% from its 52-week lows, it is still way below its last year’s highs. However, things are looking better for energy companies like ExxonMobil in 2021.
Energy demand is expected to rise in 2021
After the steep fall in 2020, energy demand is expected to gain pace in 2020 as the global economy continues its recovery. The vaccination drives should also support the demand for crude oil. As more people get vaccinated and resume outdoor activities as they did before the pandemic, we could see higher demand for gasoline as well as aviation fuels. The industrial sector’s energy demand is also expected to gain pace in 2021 amid a strengthening global economy. Higher energy demand is positive for energy companies like ExxonMobil.
Saudi Arabia’s production cuts would also help energy companies like ExxonMobil
Like all other commodities, energy prices are a function of demand and supply. The global energy market has been facing a supply glut for years as the OPEC+ wasn’t willing to sacrifice its market share to US shale producers. However, after unsuccessfully trying to maintain its market share, Saudi Arabia has now decided to lower its output.
Incidentally, while Russia was reportedly working towards pushing the OPEC+ for a production hike, the Saudis surprised everyone by announcing a 1 million barrel per day production cut for February and March.
Production cuts lift energy prices
“We are the guardian of this industry,” said Saudi Energy Minister Prince Abdulaziz bin Salman. He added, “This gesture of goodwill made by our leadership, in the name of His Royal Highness the Crown Prince Mohammad bin Salman.” The move was welcomed by Russia.
Prince Abdulaziz also said “We have the responsibility of looking after the market, and we will take all necessary actions. I have said this repeatedly and even advised that no one should bet against our resolve.”
ExxonMobil stock rises after the announcement
After the announcement, the WTI rose above $50 for the first time in 10 months. Oil prices are now above what they were prior to the pandemic. However, they are still lower than what they were at the beginning of 2020. Before the COVID-19 pandemic, OPEC’s reluctance to cut output took a toll on energy prices in 2020.
Meanwhile, there was a sharp rise in energy stocks yesterday amid the rally in crude oil prices. ExxonMobil and Royal Dutch Shell respectively rose 4.8% and 7.2%. if energy prices continue to strengthen, energy stocks like ExxonMobil could be among the winners this year.
But watch out for the Iran deal
While Saudi Arabia lowering its crude oil output is a positive move for the energy sector, investors should be watchful of the reinstatement of the Iran Nuclear Deal. While President Trump had pulled out of the deal—just like he made the US exit the Paris Climate Deal—President-elect Joe Biden is expected to reverse the course.
If the Biden administration goes ahead and removes the sanctions on Iran, the country would again start exporting oil. This might more than compensate for the 1 million barrel a day cut announced by Saudi Arabia. There is also a risk of US shale producers raising their output to take advantage of higher oil prices. However, unlike the Trump administration, the Biden administration might not be as favorable towards the US oil and gas sector.
What are analysts projecting for ExxonMobil?
According to the data compiled by CNN, ExxonMobil has a median price target of $49 which is a premium of 12.2% over its yesterday’s closing prices. Of the 26 analysts covering ExxonMobil stock, only seven have a buy rating while three have a sell rating. The remaining 16 analysts have rated ExxonMobil stock as a hold or some equivalent. If the uptrend in energy prices continues, analysts might raise ExxonMobil’s target price.
ExxonMobil stock trades at an NTM (next-12 months) enterprise value to revenue multiple of 1.14x and an NTM enterprise value to EBITDA multiple of 9.6x. The valuation multiples are based on analysts’ earnings estimates that currently don’t seem to factor in the current uptrend in energy prices.
How to buy ExxonMobil stock?
You can also bet on the energy companies through ETFs. You may choose from ETFs that invest in upstream energy companies as well as those that invest in a mix of energy companies across the value chain.
By investing in an ETF, one gets returns that are linked to the underlying index after accounting for the fees and other transaction costs. It helps you gain exposure to a diversified portfolio. There is also a guide on how to trade in ETFs.