ExxonMobil Stock Downgraded to ‘Sell’ by Redburn

Redburn has double-downgraded ExxonMobil (XOM) stock to “sell,” according to Thomson Reuters. Redburn has actually made downgrades in the entire sector. It’s downgraded not only ExxonMobil but also Royal Dutch Shell (RDS.A) to “sell.” It’s downgraded BP (BP) and Eni (E) to “neutral.”

According to Reuters, Redburn believes that energy companies are not making adequate investments in renewable energy. Plus, the brokerage house expects the crude oil market to be oversupplied due to slowing demand growth. Climate change regulations could also dent crude oil demand.

ExxonMobil stock compared to its peers

Currently, the crude oil market is under pressure due to geopolitical tensions and recession fears. Further, weaker markets and lower oil prices are negatively affecting integrated energy stocks.

In August, ExxonMobil fell 7.9%. Chevron (CVX), Royal Dutch Shell (RDS.A), and BP (BP) fell 4.4%, 11.6%, and 7.0%, respectively, in the month. Also, Total SA (TOT) stock fell 3.5% in August. However, Suncor Energy (SU) stock rose 1.8% in the month.

Do most analysts like ExxonMobil stock?

Wall Street analysts have mixed opinions on ExxonMobil stock. While 19 out of 25 analysts rate the stock as a “hold,” only five rate it as a “buy.” ExxonMobil has a sound debt position and a vast upstream portfolio. However, analysts expect its earnings to fall in the next two years. Plus, ExxonMobil stock is trading at a high forward PE. Given these mixed investment parameters, it’s no surprise analysts are divided on ExxonMobil stock.

ExxonMobil’s sound debt position and vast upstream portfolio

In the second quarter, ExxonMobil’s total debt-to-total capital ratio stood at 18.5%, the second-lowest in the industry. The ratio shows the percentage of debt in a company’s capital structure. Lower debt on a company’s balance sheet means it has more power to face harsh business conditions.

Moreover, ExxonMobil has a vast upstream asset base, which is expected to drive its long-term growth. The company’s key positions in the offshore Guyana and Permian regions continue to strengthen. In the second quarter, ExxonMobil’s hydrocarbon production rose 7% YoY to 3.91 million barrels of oil equivalent per day. Growth in liquids volumes in the Permian and higher output in Hebron drove ExxonMobil’s production growth.

ExxonMobil’s dull performance, lower earnings outlook, and premium valuation

In the second quarter, ExxonMobil’s earnings fell 21% YoY to $3.1 billion. The fall in its earnings was the result of 38% YoY and 79% YoY declines in its Downstream and Chemical segments’ earnings. Weaker margins and higher turnaround and maintenance activities impacted its earnings in these segments. However, ExxonMobil’s Upstream segment’s earnings rose 7% YoY to $3.3 billion in the second quarter. The company’s Upstream earnings rose due to higher hydrocarbon production partly offset by lower realizations.

Going forward, Wall Street analysts expect ExxonMobil’s earnings to fall 31% in 2019. Analysts expect lower oil prices to impact the company’s earnings. However, they also expect its earnings to rise 40% in 2020. Overall, in the next two years, analysts expect ExxonMobil’s earnings to fall 3%.

ExxonMobil stock is trading at a higher valuation than its peers. Its forward PE is 16.4x, and its forward enterprise value-to-EBITDA is 7.1x—both above the peer averages.

Overall

Such diverse opinions on ExxonMobil stock stem from the fact that ExxonMobil is a financially sturdy company with decades of experience facing oil cycles, but it has a dull outlook over the next two years. Plus, its stock is trading at a premium valuation.