Exxon Mobil (NYSE:), along with other fossil fuel producers, is facing three major headwinds. A range of commodities, including , rose significantly in early 2021 in anticipation of rising inflation, but then declined as market concerns about inflation eased.
Uncertainty about the pace of the economic recovery from COVID, especially now that the Delta variant has spread.
Growing concerns about climate change among individual investors and, more importantly, institutional investors. The big question is how can XOM thrive in a low-carbon world?
After closing at a YTD high of $64.66 on June 25, XOM was down 14.1% at the time of writing to $55.55, yielding a YTD total return of 41.6% . At publication, the shares traded at $54.52. The rise and fall generally coincided with commodity markets.
Source: Investing.com
The TTM earnings for XOM are negative, but the forward P/E is 13.66. The dividend yield is 6.3%. The company has reduced its total debt by $7 billion since the end of 2020. The company has reported solid reporting over the past two quarters, boosting confidence in the expectation of a return to more normal conditions. As the economy recovers and demand for energy and chemicals increases, XOM seems quite cheap.
To formulate a view of XOM, I rely on two forms of consensus. The first is the well-known consensus assessment and price target of Wall Street analysts. The second is the market-implied outlook, a probabilistic projection of the return for a stock derived from option prices. An option's price reflects the market's consensus estimate of the probability that the price of the underlying stock will fall above (call option) or below (put option) between today and the option's expiration date. ]By analyzing puts and calls with a series of strikes and a common expiration date, it is possible to calculate the statistical outlook for returns that align option prices. The market implied outlook is basically the market's consensus estimate of the opportunities for price returns. For those unfamiliar with this concept, I have written a review post with examples and links to the relevant financial literature.
Wall Street Consensus Outlook for XOM
eTrade's version of The Wall Street Consensus Outlook combines the views of 11 ranked analysts who have published opinions in the past 90 days. Of the 11 analysts, 5 are giving XOM a buy recommendation, 6 are holdings and 0 are selling. The overall rating is bullish and the 12-month consensus target is $69.50, 25.16% above the current price. Even an analyst's lowest price target implies a price return of 2.65%. The consensus price target for 12 months is significantly higher and implies a significantly higher annual price increase than when I wrote about XOM in late January. At the time, the consensus price target for 12 months was $51.88, 12.6% above the stock price at the time.
Investing.com's calculation of the Wall Street consensus is calculated based on the ratings and price targets of 30 analysts. The majority of analysts are neutral, but the number of bullish ratings is pushing the consensus rating to a buy. The consensus price target for 12 months is $66.33, 19.3% above the current price. With consensus price targets of 25% and 19%, along with a dividend yield of 6.2%, the prevailing view among Wall Street stock analysts is that XOM is in for a very strong year.
Market-Implicit Outlook for XOM
I analyzed options expiring on January 21, 2022 to build a market implied outlook for the next 4.7 months. I also calculated a 7.4-month outlook using options expiring on April 14, 2022. I selected these two expiration dates to give a view through late 2021 and early to mid-2022. These options also had a significant trading volume, increasing confidence in the outlook.
The standard presentation of the market implied outlook is in the form of a probability distribution of returns, with probability on the vertical axis and price return on the horizontal axis. Market Implied Price Return Opportunities for XOM for the 4.7 Month Period from Today to Jan 21, 2022
XOM Market Implied Outlook 4.7 Million Period Today-Jan. 21 2022
Source: Author's calculations using options quotes from eTrade
The market implied outlook is generally symmetrical. There is no clearly defined peak in probability, but the maximum probability corresponds to a price return of -2.13% over the next 4.7 months. The annualized volatility derived from this distribution is 30.5%. To make it easier to directly compare the probabilities of positive and negative returns, I'm looking at a version of the market-implied outlook where the negative returns side of the distribution is rotated around the vertical axis (see below).
XOM Market Implied Outlook 4.7 Million Period Today – Jan. 21 2022
Source: Author's calculations using option quotes from eTrade. The negative side of the distribution is rotated on the vertical axis
The probabilities of negative returns are slightly increased compared to the probabilities of positive returns of the same magnitude (the red dotted line is above the solid blue line) . Dividend-paying stocks typically have a smaller upside probability relative to a downtrend because a portion of the profits are returned to shareholders. In addition, risk-averse shareholders tend to increase the prices of put options to hedge their downside risk. Considering both factors, this market-implied outlook is neutral to slightly bullish.
Compared to my last analysis of XOM at the end of January 2021, the current market-implied outlook is significantly more positive. At that point, I calculated the market implied 4.7-month outlook using options expiring on June 19, 2021. The odds for negative returns were significantly higher than for positive returns of the same size (the red dotted curve was significantly above the blue curve) and the year-over-year volatility was 40%. At the time, I interpreted the market implied outlook as bearish.
Looking further back in time, I have also calculated the 7.4-month market implied outlook for XOM. derived using options expiring on April 14, 2022. The market implied outlook is slightly more bearish, with a higher probability of negative returns compared to positive returns of the same magnitude. I interpret this market-implied outlook as slightly bearish. The annualized volatility derived from this distribution is 30.7%. 14 2022
Source: Author's calculations using options quotes from eTrade. The negative return side of the distribution is rotated around the vertical axis.
The market implied outlook for XOM is neutral to slightly bullish between now and early 2022, turning neutral to slightly bearish, assuming 7-8 months. The near-term outlook has improved significantly since I last analyzed XOM in late January and expected volatility is significantly lower. even after a 14% decline since the end of June. The consensus outlook for earnings implies a future P/E of 13.7 and the dividend yield is 6.2%.
Earnings appear to be on track for a robust recovery from the COVID-induced economic downturn. Wall Street's consensus outlook implies a 12-month price return of around 20% and the consensus assessment is bullish, although many analysts are holding/holding a neutral stance. The analyst consensus price target is significantly more bullish than when I analyzed XOM in late January. The market implied outlook through mid-January is neutral to slightly bullish, a significant improvement from my last analysis. the end of January. With a 12-month consensus for a total return of 25% or more, an expected volatility of around 31% and a slight increase in the market implied outlook through early 2022, I am changing my view of XOM from neutral to bullish.
Given the longer-term uncertainties, I intend to review this analysis in early 2022.
