the part of exxon mobile (WKN: 852549) has only known one direction for three months: up. Since December 22, 2021, the price has risen 35.3% to the current $81.84 (as of March 23, 2022).
But we don’t only find the reasons for this within the oil company. Commodity stocks in general have been gaining momentum for months. Just two years ago, the conditions in the market were completely different: the fall in commodity prices caused a lot of problems for oil, copper and silver producers. Exxon Mobil also suffered.
At the end of April 2020, the price of oil stood at USD 21.50 per barrel. Exxon Mobil and many other oil companies were making losses at the time because their production costs were higher than the selling price of crude oil.
How to Correctly Value Commodity Stocks
The fair value of these shares always depends on the evolution of the prices of raw materials. Nothing will change about it. If you’re looking to invest in Exxon Mobil stock, or any other commodity company, you should keep this in mind.
Brent oil is currently trading at $118.95 per barrel. A few weeks ago it was almost 130 US dollars. Now that the Saudis are ramping up production again, the price has corrected again. This shows us fools once again how wildly commodity prices can fluctuate. I can well imagine the around US$95 mark as the average annual oil price.
That mark is also a key part of my guess when evaluating Exxon Mobil stock. The task is to determine where Exxon Mobil shares stand if the price of oil is really close to $95.
Exxon Mobil is a big oil tanker
The mineral oil company is the largest in the USA and ranks 3rd worldwide, in the following table I show you the comparison of sales with Total Energies (WKN: 850727) and gallons (WKN: 852552).
Exxon Mobil groans under relatively high costs
Exxon Mobil’s financing costs are currently around US$41. This makes them roughly double that of the French oil company TotalEnergies. The annual production volume is almost 40% higher than that of the European competitor.
If we assume that the annual production volume remains stable, then the oil reserves will last another 9.5 years. The group has set itself the goal of reducing production costs to US$30 by 2027. The company wants to achieve this by shedding less profitable projects.
Action is really worth that much
I’ve stated this before: To determine the fair value of the stock, I make the following five basic assumptions:
Production costs are US$41 per barrel.
Annual production remains at the current level of 1.4 billion barrels.
The average price of oil is 95 US dollars.
Exxon Mobil’s capital expenditure, or CAPEX, is $25 billion per year.
The free cash flow multiplier is exactly 10.
With that in mind, I estimate the fair value of the shares to be around $90. So, at the current price of $81.84, it is in the waiting zone. An investment is not an option for me at this time. But that can quickly change with the next reset of the course.
Also, I can’t blame anyone who is already buying because of the generous dividend. Exxon Mobil has been a reliable dividend payer for years. The dividend yield at the current price is 4.3%. An equally interesting stock for dividend seekers is this one.
The article Warren Buffett now bets on oil companies: This stock could be his next catch first appeared in The Motley Fool Germany.
Henning Lindhoff owns shares in Chevron. The Motley Fool does not own any of the shares mentioned.
Motley Fool Germany 2022