Should Investors Pay a Premium for ExxonMobil Stock Now?

Exxon Mobil Corporation XOM is currently considered expensive on a relative basis, with the stock trading at a 7.71x trailing 12-month Enterprise Value to Earnings Before Interest, Taxes, Depreciation and Amortization (EV/EBITDA), which is at a premium compared with the broader industry average of 4.82x. XOM’s valuation also exceeds that of other integrated energy majors such as BP plc BP and Eni SpA E, which are currently trading at 3.22x and 5.18x, respectively.

Is the premium valuation indicating the market’s strong confidence in the prospects of the integrated energy giant? To conclude, whether such a higher valuation is justified warrants closer scrutiny. 

Advantageous Upstream Assets to Back ExxonMobil

XOM has a strong footprint in the Permian, the most prolific oil and gas play in the United States, and offshore Guyana. In the Permian, the integrated giant has been employing lightweight proppant technology and hence has been capable of boosting its well recoveries by up to as much as 20%.

In Guyana, XOM has made several oil and gas discoveries, further highlighting the company’s solid production outlook. Notably, record production from both resources has been aiding its top and bottom lines. Importantly, in both resources, the breakeven costs are low, thereby aiding XOM in continuing its upstream business even during a low crude pricing environment.

In its recent corporate plan update, ExxonMobil projects its total production from upstream operations to increase to 5.5 million oil equivalent barrels per day by the end of this decade. The energy behemoth added that its advantageous assets, which include the Permian, Guyana, and LNG, will be responsible for 65% of the total volumes.  

XOM’s Resilient Refining, Conservative Capex & Strong ROCE

XOM’s resilient refining operations give support when oil prices turn low and the upstream business suffers. The company highlighted on its third-quarter earnings call that low-value fuel is getting upgraded in its Singapore Resid Upgrade to high-value end products, thereby meeting the growing demand for cleaner fuels.

The energy giant also has a conservative capital spending strategy while maintaining strong productivity. Notably, the integrated major expects its earnings and cash flows to improve without increasing its capital spending, which is a strong positive.

Importantly, by the end of this decade, XOM expects its return on capital employed (ROCE) to exceed 17%. The company also has a strong focus on returning capital to shareholders, as reflected by the fact that in the S&P 500, it is the second-largest payer of dividends. XOM has hiked dividends consecutively for more than four decades and also has an aggressive share buyback program.

Should Investors Bet on the Stock?

XOM also has a strong balance sheet. The company’s debt to capitalization of 13.6%, significantly lower than 28.7% of the industry and BP and Eni’s 43.7% and 35.5%, respectively. Thus, the integrated firm will keep on getting low-cost funds even if the business scenario turns unfavorable.

The positives are visible in the price chart. Over the past year, the stock gained 13.6%, outperforming the industry’s composite stocks, which improved 13.3%. BP and E, the other two integrated stocks, however, have rallied 29% and 44.8%, respectively, in the same time frame.

ExxonMobil stock has more room to grow because, in its updated corporate plan, XOM has revised its projected earnings growth upward to roughly $25 billion through 2030, since 2024, from more than $20 billion in the prior plan.

However, investors shouldn’t rush to bet on the stock right away. This is because, in its latest short-term energy outlook, the U.S. Energy Information Administration (“EIA”) projects the spot average West Texas Intermediate price at $51.42 per barrel for 2026, lower than its expected $65.32 in 2025 and $76.6 last year. Rising oil inventories across the globe are hurting the commodity price, stated EIA.

Since XOM generates the king size of its earnings from upstream operations, the fate of which is positively correlated to oil prices, it is better not to bet on the stock now. However, those who have already invested may continue to hold the stock. Like XOM, the upstream businesses of BP and E are also likely to get hurt from lower oil prices.

ExxonMobil currently carries a Zacks Rank #3 (Hold). 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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