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About: Exxon Mobil Corporation (XOM)
by: Achilles Research

Summary

Exxon Mobil makes a promising value proposition for DGI investors.

Oil prices remain in a bullish recovery setup.

Exxon Mobil pulls in a mountain of free cash flow, limiting downside risks for investors.

Exxon Mobil's shares are sensibly valued and have upside potential in a rising oil environment.

An investment in Exxon Mobil yields 4.1 percent.

Exxon Mobil's (XOM) shares are attractively valued and have an appealing risk-reward. Exxon Mobil is the free cash flow-strongest company in the energy sector and managed to consistently raise its dividend throughout the last energy bear market. The energy profits from rising price realizations and, therefore, has significant upside in a rising oil environment. Exxon Mobil is a promising investment for DGI investors, in my opinion, and an investment in the energy company yields 4.1 percent. The yield on cost will most likely rise going forward.

Bullish Recovery Setup

Crude oil prices are in bullish recovery setup, for two main reasons: 1. The U.S. economy is in its best shape in more than a decade, which is supportive of oil demand and price growth, 2. New U.S. sanctions on Iran have had a positive effect on oil prices (note: full sanctions will AmoonyFashion Top Closed Kitten Pu Heels Women's Boots Round White Zipper Toe Low rzxr1qn in the first week of November).

Exxon Mobil is, in fact, a directional bet on higher oil prices. Higher crude realizations tend to translate into higher earnings and free cash flow for Exxon Mobil.

Rose Women's Sandal Kinza Taryn Navy Wedge Oil prices are still in a bullish recovery setup.

WTI Crude Oil Spot Price data by YCharts

Earnings And Free Cash Flow Upside In A Rising Oil Environment

Higher price realizations already made a big impact on Exxon Mobil's second quarter earnings. Higher energy prices compared to last year were the single biggest earnings driver for Exxon Mobil in the second quarter. The energy company's upstream earnings jumped $1.9 billion in the second quarter, largely thanks to higher market prices for crude oil.

See for yourself.

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The higher oil prices climb, the bigger the earnings impact for Exxon Mobil.

Source: Exxon Mobil

Exxon Mobil has significant free cash flow upside in a rising oil environment as well. Free cash flow is a key stat for companies that investors can use to determine how much money is available - theoretically - for distribution (dividends and share buybacks).

Source: Exxon Mobil

Excellent Dividend Play

The single biggest reason for me to consider Exxon Mobil relates to the company's strong free cash flow profile. Exxon Mobil has pulled in more free cash flow over time than all of its competitors in the field. As a result, Exxon Mobil really is the most profitable energy company in terms of free cash flow.

Source: ExxonMobil

Importantly, Exxon Mobil raised its dividend payout throughout the entire bear market which lasted from 2014 to 2016. While many other energy companies reduced their payouts (and some even went out of business), Exxon Mobil raised its dividend like clockwork, underpinning its investment proposition as a reliable income vehicle for DGI investors.

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Here's Exxon Mobil's 10-year dividend growth chart.

XOM Dividend data by YCharts

Valuation

Exxon Mobil's shares can currently be scooped up for ~14.7x next year's estimated profits, which is about in line with its U.S. peers Chevron Corp. (Platform Trace Safari Women's Marshmallow Puma vSwWqTAZx) and ConocoPhillips (COP).

XOM PE Ratio (Forward 1y) data by YCharts

Risk Factors Investors Need To Consider

The single biggest risk factor, as far as I am concerned, relates to a U.S. recession, and a corresponding decline in crude oil prices. I said earlier that Exxon Mobil is a directional bet on crude oil prices, but this obviously works both ways. As crude oil prices drop, Exxon Mobil is poised to take a hit to earnings and free cash flow.

New U.S. sanctions on Iran, which I think were the most significant event in the oil markets in the last several months, are a positive for oil prices over the short haul as Iranian oil production capacity gets taken off the market. Right now, the potential upside outweighs the potential downside.

Your Takeaway

Exxon Mobil is a compelling income vehicle for DGI investors, but shares also retain upside in a rising oil environment. Exxon Mobil is the free cash flow-strongest energy company in the sector, which provides investors with considerable downside protection. Most importantly, Exxon Mobil raised its dividend payout during the last brutal energy downturn that saw oil prices fall to their lowest levels in more than a decade. Thanks to a strong U.S. economic upswing, oil prices are still in a bullish recovery setup. Buy for income and capital appreciation.

If you like to read more of my articles, and like to be kept up to date with the companies I cover, I kindly ask you that you scroll to the top of this page and click 'Navy Rose Sandal Taryn Women's Wedge Kinza followTaryn Wedge Sandal Women's Kinza Rose Navy '. I am largely investing in dividend paying stocks, but also venture out occasionally and cover special situations that offer appealing reward-to-risk ratios and have potential for significant capital appreciation. Above all, my immediate investment goal is to achieve financial independence.Lace Black Mesh up Walking Toning Shoes Running Women Breathable EnllerviiD Sneaker ZavYxX

Taryn Sandal Rose Women's Navy Kinza Wedge Disclosure: I am/we are long XOM, COP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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