Exxon Mobil's stock could fall behind its peers - so stop buying, analyst says

By Tomi Kilgore

Truist's Neal Dingmann expects free-cash-flow yield to trail peers 'well into 2025' and dividend yield doesn't match up

Shares of Exxon Mobil Corp. fell Friday, as Truist Securities backed away from its bullish call, citing a number of concerns, such as the belief that the oil giant's free-cash-flow yield will trail that of peers "well into 2025."

Other reasons for the rating downgrade include worries about pressure on oil prices and a relatively low dividend yield.

Analyst Neal Dingmann cut his rating on the stock to hold after being a buy for the past eight months. He lowered his price target by 15%, to $124 from $146.

The stock (XOM) fell 0.4% in premarket trading. It has pulled back 6.7% since closing at a record $122.20 on April 10, while the Energy Select Sector SPDR ETF XLE has shed 7.6% and crude-oil futures (CL.1) have dropped 10.2% over the same time.

Dingmann believes Exxon Mobil will continue to see growth through its "world-class" assets, he said. Still, he expects the stock to potentially underperform its peers in the near term, due to valuations and a bit of "digestion" after the $59.5 billion acquisition of Pioneer Natural Resources closed in early May.

He added that while he appreciates the recently announced increase in the shareholder return program, he believes Exxon's free-cash-flow yield will be below that of its peers "well into 2025." In April, Exxon said it would increase the annual pace of stock buybacks to $20 billion, after repurchasing $17.4 billion worth of shares in 2023.

Free-cash-flow yield is free cash flow, or cash generated from operations, excluding the costs to run those operations, relative to market capitalization.

Despite the expected boost in FCF next year from the Pioneer acquisition, he projects a 2025 FCF yield of less than 9%, up slightly from the 2024 FCF yield of less than 8%.

"The company's yields are lower than many peers who we forecast to have FCF yields of as high as 12% this year and nearly 15% next year," Dingmann wrote in a note to clients.

He said part of the lower FCF can be explained by Exxon using 10% of its capital expenditures on lower-return sustainable businesses.

Among other reasons for the downgrade, Dingmann worried that pressure on oil prices resulting from recent moves by major oil-producing countries "could cause non-energy type investors" to sell shares.

The correlation coefficient between Exxon's stock and crude-oil futures over the past year was a relatively high 0.76 through Thursday, where a reading of 1.00 would mean they move exactly in tandem. In comparison, the correlation between Exxon's stock and the S&P 500 index SPX was 0.32.

Dingmann noted that Exxon's current dividend yield, which was 3.33% at Thursday's close, is below that of its peers' yields of 4% to 5%.

Within the SPDR energy ETF, Exxon's stock is the 7th-highest yielding. The highest yielder is Kinder Morgan Inc.'s stock (KMI) at 5.81%. The dividend yield for Chevron Corp.'s stock (CVX) is 4.18%.

-Tomi Kilgore

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06-07-24 0844ET

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