We recently compiled a list of the 8 Best Undervalued Energy Stocks To Buy According to Analysts. In this article, we are going to take a look at where Exxon Mobil Corporation (NYSE:XOM) stands against the other undervalued energy stocks.
Following another eventful year for the global energy sector, 2024 continues the trend of disruptions, headwinds, and opportunities. The previous year concluded with a landmark agreement at COP28 to reduce global methane emissions, a significant contributor to worldwide emissions. Despite being one of the world’s more mature industries, the international energy sector remains incredibly dynamic, with journalists, governments, investors, and analysts paying special interest to developments within the industry to assess their potential impact on the global business and economic landscapes.
Energy stocks experienced negative returns in 2023, but have risen in early 2024 alongside the price of oil. Generally, energy stock prices tend to track changes in energy prices. For instance, when energy prices peaked in 2022 due to Russia’s invasion of Ukraine and the lingering effects of the COVID-19 pandemic, many companies in the energy sector saw gains. Global production levels are also crucial to the sector’s performance. While U.S. oil production has been relatively high in recent months, many OPEC+ countries have capped production. Although demand for energy products continues to grow, there is uncertainty about whether supply will increase accordingly.
On another front, global investment in the energy transition has increased tremendously over the years, hitting the $1.8 trillion mark in 2023, flagging a 17% rise from the previous year, according to BloombergNEF. However, this amount is a fraction of the $1.77 trillion invested globally, with the business case for adopting renewable energy becoming more compelling for companies. Conversely, the oil and gas sector has seen a significant surge in merger and acquisition activity, with over $155 billion in deals in the fourth quarter of 2023. This total surpasses the combined value of deals from the previous five quarters. Facing challenging market and economic conditions, oil and gas companies—especially those in upstream, midstream, and oil field services—are expected to continue this consolidation trend into 2024.
Oil prices bottomed on June 5 due to an unexpected increase in U.S. crude stocks and a larger-than-anticipated rise in fuel inventories, heightening demand concerns amid potential supply growth later this year. At the time data from the U.S. Energy Information Administration showed that the U.S. crude stockpile rose by 1.2 million barrels in the week ending May 31, contrary to analysts’ expectations of a 2.3 million barrel draw. However, this build was less than the American Petroleum Institute’s report, which indicated an increase of over 4 million barrels. On the other hand, gasoline inventories increased by 2.1 million barrels, exceeding expectations of a 2 million barrel rise. This contributed to demand concerns, as the week reflected fuel usage around the Memorial Day holiday, traditionally seen as the start of the U.S. summer driving season. Oil prices increased by about $5 since then, currently trading above $78 per barrel.
The energy industry is not only massive but also holds significant growth potential. According to the United Nations, achieving the goals of the Paris Climate Agreement will require an annual investment of $2.4 trillion in energy systems over the next 11 years. Illustrating this growth, a report states that the global renewable energy market, valued at $899.24 billion in 2022, is expected to grow from $1,050.31 billion in 2023 to $3,637.99 billion by 2031, at a CAGR of 16.80% during the forecast period.
The current year promises to be another rollercoaster ride for the energy industry, raising critical questions about the feasibility of achieving the net-zero targets outlined in the Paris Agreement. Commenting on this, Rystad Energy CEO Jarand Rystad remarked:
“Last year was a pivotal one for the energy world. Renewable energy capacity expanded rapidly, keeping up with global power demand growth for the first time. Solar PV needed to grow by 220 gigawatts (GW) in 2023 to track the 1.6 DG scenario for global warming. The latest figures now indicate that it could end up at above 400 GW. And there is now supply chain visibility for an annual delivery of 1,500 GW. Global coal demand most likely peaked in 2023, and clean energy technologies are now more affordable than fossil fuel alternatives in most parts of the world. Fossil fuels will, however, remain an important component of the energy mix for the next decades. Countries like Denmark, Finland and Portugal are close to achieving zero carbon power sectors, successfully dealing with the intermittency challenge of renewables. Still, there are also setbacks in renewable deployment, like the cost inflation seen in offshore wind, and governments will need to step up stimulation to get these sectors back on track. This year could see more inflection points in the energy transition, with impacts felt well into the latter half of the decade.”
With this context in mind, we are now talk about Wall Street analysts’ best undervalued energy stocks to buy.
Our Methodology
To compile our list of the best undervalued energy stocks to buy according to analysts, we used a stock screener to identify energy stocks with price-to-earnings (P/E) ratios below 25. We then ranked these firms based on their average analyst share price target upside. For each of these energy stocks, we have also included hedge fund sentiment. Why do we track stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A refinery, the sun illuminating its engineering complexity.
Exxon Mobil Corporation (NYSE:XOM)
Average Analyst Estimates as of May 28: $136.87
Average Analyst Upside as of May 28: 17.32%
P/E Ratio: 14.31
Exxon Mobil Corporation (NYSE:XOM) has been a dominant force in the LNG sector for over four decades, with its roots dating back to John D. Rockefeller’s Standard Oil. Over its 140-year history, Exxon Mobil has transformed from a local kerosene distributor in the United States to a global industry leader, ranking prominently among the top publicly traded companies in the petroleum and petrochemical fields.
On April 26, Exxon Mobil Corporation (NYSE:XOM) announced first-quarter earnings of $8.2 billion, or $2.06 per diluted share. The company’s capital and exploration expenditures were $5.8 billion, in line with its full-year guidance of $23 billion to $25 billion.
That said, not everyone seems bullish on XOM. Truist Securities recently downgraded its rating on Exxon Mobil Corporation (NYSE:XOM) from Buy to Hold and lowered the price target from $146.00 to $124.00, a change reflecting the firm’s view that ExxonMobil’s shares may underperform compared to its competitors in the near term due to current market valuations and the recent acquisition of Pioneer. While acknowledging the positive impact of the company’s Guyana operations and the Pioneer acquisition, it expects the company’s free cash flow (FCF) yield to remain below that of its peers until at least 2025. This expectation is partly due to the ongoing integration of Pioneer’s operations, a process often referred to as “digestion” in the industry.
As of the end of the first quarter of 2024, Insider Monkey’s tracking data showed that 81 out of 919 hedge funds held stakes in Exxon Mobil Corp (NYSE:XOM). The largest stakeholder among them was Ken Fisher’s Fisher Asset Management, with a $3.07 billion investment.
Madison Dividend Income Fund stated the following regarding Exxon Mobil Corporation (NYSE:XOM) in its first quarter 2024 investor letter:
“This quarter we are highlighting Exxon Mobil Corporation (NYSE:XOM) as a relative yield example in the Energy sector. XOM is a leading integrated oil and natural gas company. It has upstream assets that develop and produce oil and natural gas, along with downstream refining and chemical manufacturing assets. We believe it has attractive low-cost acreage in the Permian basin and has a sizeable growth opportunity in Guyana. Further, we think XOM has a sustainable competitive advantage due to size and scale, and its ability to integrate refining and chemical assets provides a low-cost advantage versus competitors.
Our thesis on XOM is that it will grow production volumes of oil and gas moderately over the next few years, while limiting excessive capital investment that plagued the industry from 2014-2020. Production growth will come from its 2023 acquisition of Pioneer Natural Resources, which is the largest producer in the Permian basin. XOM plans to double its Permian output by 2027, to 2 million barrels per day. Capital spending will be limited to $20-25 billion per year through 2027, which should allow for significant amounts of cash to be returned to shareholders including a $35 billion share repurchase program and continued dividend increases. Higher oil prices would provide a tailwind to our thesis but are not necessary. We think XOM can grow earnings and cash flow if oil prices remain above $60 per barrel…”
Overall XOM ranks 5th on our list of the best undervalued energy stocks to buy. You can visit 8 Best Undervalued Energy Stocks To Buy According to Analysts to see the other energy stocks that are on hedge funds’ radar. While we acknowledge the potential of XOM as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than XOM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.