Is Exxon Stock a Buy for Its Dividend?
Morningstar’s analyst says Exxon’s dividend is solid—but the stock isn’t cheap.
While many of its peers are diverting investment to renewables to achieve long-term carbon intensity reduction targets, ExxonMobil XOM remains committed to oil and gas. It has responded to calls to bring in more outside voices to its board and announced emissions reduction targets. It is also investing in low-carbon technologies, but each of these efforts is measured and keeps oil and gas production at the core. While this strategy is unlikely to win praise from environmentally oriented investors, we think it’s likely to prove more successful and probably holds less risk. Exxon has capped spending at $20 billion-$25 billion annually through 2027, so we believe it can protect the dividend even if commodity prices are marginally lower than expected.
Key Morningstar Metrics for Exxon
- Fair Value Estimate: $118
- Star Rating: 3 Stars
- Economic Moat Rating: Narrow
- Moat Trend Rating: Stable
Economic Moat Rating
We view Exxon’s competitive position as weakened relative to where it has been historically. As a result, we forecast narrower future excess returns than in the past, but we expect improvement from recent levels so that they are sufficient to maintain a narrow moat rating. We continue to see Exxon’s integrated model as a source of competitive advantage. Historically, Exxon has rated as one of the highest-quality integrated firms, thanks to its ability to capture economic rents along the oil and gas value chain. While its peers operate similar business models with the same goal, they have largely failed to replicate Exxon’s success, as evidenced in their comparatively lower margins and returns.
Read more about Exxon’s moat rating.
Fair Value Estimate for Exxon Stock
We recently raised our fair value estimate to $118 per share from $102 after incorporating the latest strategic guidance, financial results, and commodity prices. Our fair value estimate implies a forward enterprise value/EBITDA multiple of 6.1 times our 2023 EBITDA forecast of $74.6 billion. We assume U.S. natural gas prices of $3.18 per thousand cubic feet in 2023 and $3.69 in 2024. Our long-term assumption is $3.30 beginning in 2025. For oil, we assume Brent prices of $80 per barrel in 2023 and $76 in 2024. Our long-term oil price assumption is $60 per barrel. We assume a cost of equity of 7.5% and weighted average cost of capital of 7.3%.
Read more about Exxon’s fair value estimate.
Risk and Uncertainty
Exxon holds a High Morningstar Uncertainty Rating based on fundamental exposure to commodity prices, evaluation of environmental, social, and governance risks, and the range of return outcomes. Exxon faces the risk that global oil demand falls quickly, leaving it unable to fully develop its reserves. Our research suggests oil demand will not decline materially for several more decades, implying that more supply will be needed and the risk of stranded assets for Exxon is low. Greater adoption of electric vehicles in the United States and Europe could threaten the long-term viability of Exxon’s downstream assets, but we think those assets will remain viable for decades, given their low cost, complexity, size, and integration with chemicals.
Read more about Exxon’s risk and uncertainty.
Exxon Bulls Say
- Exxon has responded to shareholder concerns by reducing spending, appointing new board members, increasing disclosure, and announcing emission-reduction targets.
- Exxon will see its portfolio mix shift to liquids pricing as gas volumes decline and new oil projects start production. Cash margins should improve as a result, thanks to Permian and Guyana volumes.
- With coordination between upstream and downstream operations, as well as integrated refining and chemical facilities—as opposed to simply owning the assets—Exxon achieves a high level of integration that creates value.
Exxon Bears Say
- Despite activist pressure and new board members, Exxon has not sufficiently reduced hydrocarbon investment levels and continues to develop long-life projects that hold a high risk of becoming stranded.
- Exxon lacks the level of investment in low-carbon businesses, such as renewable power, of its peers and risks not sufficiently reducing its emissions or securing its future as a going concern.
- Returns are unlikely to ever reach historical levels without higher commodity prices, potentially resulting in compression of Exxon’s premium multiple.
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The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.