Exxon Mobil Corporation XOM is currently considered expensive on a relative basis, with the stock trading at a 6.88x trailing 12-month enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA), which is a premium compared with the broader industry average of 4.20x. Such a premium valuation often signals strong market confidence in the company’s prospects.

XOM's Current Valuation

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However, this elevated price necessitates a thorough assessment of the company’s fundamentals, growth potential and prevailing market conditions to check if it is justified.

Permian & Guyana: Twin Engines of ExxonMobil’s Expansion

With a strong focus on strengthening its presence in the Permian, ExxonMobil completed the acquisition of Pioneer Natural Resources Company on May 3, 2024. With 1.4 million net acres of the combined company in the Delaware and Midland basins, having an estimated 16 billion barrels of oil equivalent resource, ExxonMobil has greatly transformed its upstream portfolio.

Based on 2024 volumes, the company expects its production from the most prolific basin to increase significantly to 2.3 million barrels of oil equivalent per day (MMBoE/D) by 2030, thanks to the improved drilling & production techniques.

Similar to its operations in the Permian, ExxonMobil boasts a robust project pipeline in offshore Guyana resources. Notably, Guyana operations have achieved a production rate of 650,000 barrels per day within just 10 years of the initial oil discovery.

Thus, the integrated energy giant is well-positioned to generate significant returns from both the Permian and Guyana due to low production costs in these assets. With oil prices remaining favorable this year, ExxonMobil is poised to generate substantial cash flows from its upstream operations, which contribute the majority to its total earnings.

Driving Success: XOM’s Integrated Model & Financial Discipline

Due to its integrated business model, ExxonMobil is well protected when oil prices decline. This is because, apart from exploration and production activities, the company has an extensive footprint in refining and chemical businesses.

During uncertain times, ExxonMobil can rely on its robust balance sheet. Compared to the industry’s composite stocks, which have a debt-to-capitalization ratio of 27.79%, ExxonMobil has a much lower ratio at 13.36%. Favorable commodity prices have enabled it to enhance its financial position and repay the debt incurred during the pandemic.

Chevron Corporation CVX is another integrated energy giant with a strong balance sheet. Belonging to the same industry, Chevron has a slightly higher debt-to-capitalization ratio of 13.81%. BP plc BP, another major player in the integrated energy space, is also reducing its debt load on higher oil prices and decreased capital spending. BP’s debt-to-capitalization ratio is much higher at 41.82%.

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XOM: Surplus Cash Flow & Clean Energy Commitment

The integrated energy giant plans to generate $165 billion in surplus cash flow over the 2025-2030 period, thanks to disciplined capital allocation and improved earnings power. This surplus cash will support increased shareholder distributions, including dividends and share repurchases, enhancing the company's track record of delivering consistent shareholder value.

Moreover, ExxonMobil’s plans to invest $30 billion in low-carbon solutions from 2025 to 2030 underscore its commitment to sustainability and growth. A key focus is on carbon capture and storage networks and hydrogen facilities, including the world’s largest low-carbon hydrogen plant in Baytown, producing near-carbon-free hydrogen. With 65% of investments targeting third-party emission reductions, this strategy aligns with global energy transition goals while leveraging ExxonMobil’s expertise to deliver strong returns.

XOM: Capitalizing on LNG Growth Amid Market Volatility

ExxonMobil presents a compelling investment opportunity, particularly with the recent U.S. Department of Energy approval for an export extension at its Golden Pass LNG project in Texas. This $10 billion project, developed in partnership with QatarEnergy, positions Exxon to capitalize on the growing global demand for liquefied natural gas (LNG), especially in Asia and Europe. The ability to export up to 2.57 billion cubic feet per day enhances ExxonMobil's long-term revenue potential, reinforcing its role in the global energy transition. Additionally, despite oil price volatility, ExxonMobil's integrated operations and investments in natural gas infrastructure provide a hedge against declining crude prices, ensuring resilience amid market fluctuations.

Do Fundamentals Justify ExxonMobil’s Elevated Valuation?

The positive developments have led to ExxonMobil’s premium valuations, as investors have high expectations for the company’s future growth and profitability. However, several uncertainties cloud the stock. While the company highlights its advantaged assets, much of its upstream production remains dependent on fossil fuels, leaving it vulnerable to regulatory challenges and market shifts amid the global energy transition.

Additionally, with its continued emphasis on oil and gas, ExxonMobil is at risk of heightened scrutiny from environmental groups and stakeholders pushing for cleaner energy solutions. Moreover, Exxon’s stock recently hit a 52-week low, reflecting investor concerns over oil price weakness and potential trade conflicts that could further impact profitability.

All those uncertainties are getting reflected in XOM’s price performance. Over the past year, the stock gained only 3.4%, underperforming the 4.5% improvement of the industry’s composite stocks. 

One-Year Price Chart

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Despite the underperformance, XOM still appears to be overvalued. While the Zacks Rank #3 (Hold) XOM’s solid fundamentals and strategic investments reinforce its strength in the energy sector, its current premium valuation and prevailing uncertainties suggest that investors may be better off waiting. Exercising patience could help mitigate risk and improve long-term returns. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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