ExxonMobil Stock’s Biggest Risk Is The Shortage Ending

ExxonMobil Stock's Biggest Risk Is The Shortage Ending

ExxonMobil's refining and chemical margins rest on capacity that is offline elsewhere, which makes a return to normal supply the risk worth weighing.

ExxonMobil (XOM) trades at $160.64, roughly 95% of its 52-week high, after returning 48.5% over the past twelve months against 19.7% for the S&P 500. The company did not get there on upstream volume, which the Middle East conflict reduced even as production outside the region hit its highest level in more than two decades. It got there with several million barrels a day of the world's production offline, and the clearest risk to the stock is that supply comes back.

The Margin Came From Capacity That Is Not Running Elsewhere

By management's own account, roughly 3 million barrels a day of capacity is out of the market behind the shipping-lane closure in the Middle East, another couple of million barrels a day of refining capacity is not available to the market with China no longer exporting, and Ukraine has taken out roughly a million more of Russian refining capacity. Into that gap, Exxon's Gulf Coast refineries set a second-quarter diesel production record, chemical product margins ran about 180% above the first quarter, and Specialty Products delivered its best basestock margins on record. Year-over-year revenue growth, negative in two of the past four quarters, reached 44.1% in the second quarter.

What A Reopening Gives Back And What It Takes Away

Management does not expect the disruption to last, but does not expect a quick reversal either: its view is that the world needs the region's resources and traffic through the closed lane will eventually return, though the timing can't be predicted and volumes are expected to ramp back slowly even once it reopens. The awkward part for a holder is that the case for normalizing is also the case for the pricing environment ending. A reopening returns the roughly 10% of ExxonMobil's own upstream production the conflict took away, and with it the competing supply whose absence is setting downstream prices today.

Two things are true independent of the outage: in Guyana, the company recovered its investment nearly two years earlier than planned, an acceleration management says holds even with the price effect stripped out, and structural cost savings have reached $16.3 billion since 2019. Cash generation that survives a price cycle is one of the things the Trefis High Quality Portfolio looks for in its holdings.

Rich On Sales And Cheap On Earnings Only Against Peers

On price-to-sales the shares sit about 79% of the way up their own ten-year range, while against its closest peers the company carries one of the highest net margins and one of the lowest earnings multiples. A sales multiple this far up its own ten-year range beside an earnings multiple this low against its peers reads as a discount on profit that is borrowing from somebody else's outage, not as cheapness. The market is not pricing anything unusual: implied volatility of 28 sits at the 53rd percentile of its own trailing year, ordinary expected movement for a stock that fell 20.1% peak to trough inside the past year.

For sizing, the useful starting point is how wide a twelve-month range the options market is pricing. The business is not breaking, and management expects it to take the industry a while to climb out of the supply hole; the risk is that the profit level is rented, and what to watch is whether refining and chemical margins hold as shipping traffic normalizes.

Owning Exxon Here Means Owning A View On A Shipping Lane

A position here is, right now, a position on when that lane reopens. The Trefis High Quality Portfolio spreads the work of compounding across a rules-based set of businesses rather than resting it on one commodity outcome. That portfolio has a track record of outpacing the three major indices - the S&P 500, S&P Mid-cap, and Russell 2000.