Exxon Mobil Stock: Game Over (NYSE:XOM)

ExxonMobile Posts Record Breaking Quarterly Profit

David McNew

The market is slowly coming to terms with the fact that the U.S. and worldwide economies are on the verge of a prolonged and severe decline.

With inflation and, increasingly, the U.S. central bank posing significant risks to the economy, Exxon Mobil Corporation (NYSE:XOM) (“ExxonMobil”) is likely to suffer in the future if oil prices continue to fall.

While ExxonMobil recorded great profitability in 2Q-22 as a result of inflated high oil prices, I believe ExxonMobil’s earnings forecast has significantly worsened in recent weeks.

With crude oil prices falling below $80 per barrel, I believe ExxonMobil has already passed its profits peak and is on track to record much lower earnings for 3Q-22, compared to the second quarter.

Previous Short Position

I am biased in my analysis of ExxonMobil since I opened a short position on the oil business by purchasing out-of-the-money options with a strike price of $70 and the ProShares UltraShort Bloomberg Crude Oil ETF (SCO).

Recent Change In Market Sentiment And Falling Prices For Crude Oil

ExxonMobil’s shares fell 5.32% on Friday as investors were increasingly concerned about the status of the U.S. and worldwide economies.

The reason: Inflation remains a major concern for consumers, and the central bank raised interest rates by 75 basis points last week to combat it. This third rate hike, on the other hand, risks sending the U.S. economy into a recession, prompting a selloff in energy assets such as crude oil.

Crude oil prices reached above $130 early this year, around the time Russia began its war with Ukraine, but they have fallen significantly in recent weeks as investors’ fears of a more severe recession have taken root.

According to GDP data from the first two quarters of 2022, the United States is already in a recession, but things might become worse for ExxonMobil if crude oil prices continue to fall.

WTI crude oil prices have fallen about 35% since June, and the recent drop appears to have gained momentum of its own.

Crude Oil WTI

Crude Oil WTI (Finviz)

As WTI crude oil prices fell by almost 5% on Friday, ExxonMobil’s stock price fell by a comparable percentage, indicating a strong link between the two prices. Clearly, the market anticipates a deeper recession, and recessions are often unfavorable for energy businesses like ExxonMobil.

ExxonMobil Has Seen Its Earnings Peak In The Second Quarter

ExxonMobil made $11.4 billion in profits in its upstream division in the second quarter, a 153% rise QoQ, nearly entirely attributable to higher upstream pricing. This jump in earnings growth is not sustainable, and investors should brace themselves for a significant drop in upstream earnings in 3Q-22, the results of which will be disclosed in roughly a month.

2Q-22 Investor Relations Data Summary

2Q-22 Investor Relations Data Summary (ExxonMobil)

Only A Question Of Time Until ExxonMobil’s P/E-Ratio Increases

ExxonMobil’s stock is about to become much more expensive as experts assess the recent dip in crude oil prices and alter their projections downward. With expectations falling, ExxonMobil’s earnings multiple is expected to rise, making the company’s earnings more costly for stock buyers.

The market currently forecasts $10.91 in profits per share for 2023, a 14% decrease YoY.

I disagree with the predicted profits loss’s magnitude and believe that the 35% drop in crude oil prices since June already implies a significantly higher potential earnings decline.

Earnings Estimate

Earnings Estimate (Yahoo Finance)

The eventual drop in ExxonMobil’s profit base will, of course, be determined by the average realized crude oil price, but given the changing economic landscape and increased recession risks, ExxonMobil’s earnings multiple is certain to continue contracting.

ExxonMobil’s stock has a P/E ratio of 7.9x based on anticipated earnings (2023). Having said that, a 50% drop in earnings (which I predict for 2023) would double ExxonMobil’s earnings multiple to 17x.

Why ExxonMobil Could See A Higher Valuation

If a deeper recession is avoided and energy prices stabilize in the $80-90 per barrel range, I believe ExxonMobil will continue to record good underlying profitability, mostly from the upstream division. In this instance, the stock would most certainly perform well too.

ExxonMobil’s fortunes are more dependent than ever on a robust price environment, and a new boom-to-bust cycle would almost certainly have major ramifications for the company’s short-term profits potential as well as its earnings multiple.

Investors should be aware that both the crude oil price and the stock price of ExxonMobil have likely already peaked.

My Conclusion

In my opinion, crude oil prices have clearly peaked and the bubble is bursting, implying that ExxonMobil and the company’s earnings potential will suffer in the short run.

ExxonMobil will disclose earnings for the third quarter next month, and investors should expect considerably lower earnings than in the second quarter.

I believe ExxonMobil’s profitability peaked in 2Q-22, notably in upstream, and that a new boom-to-bust cycle is currently underway.

ExxonMobil will most likely be able to maintain its present quarterly dividend of $0.88 per share, but the stock faces some major headwinds in the near future, particularly if crude oil prices continue to fall.

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