In my recent Imperial Oil (IMO) Is Gushing Free Cash Flow guest post at Dividend Power, I explain why I am not initiating a position in the company. Instead, I am increasing my exposure to Exxon Mobil Corporation (XOM) which owns 69.6% of IMO; my Exxon Mobil (XOM) Shareholders Are Finally Being Rewarded guest post is now accessible at Dividend Power.
Recent higher oil and gas prices are contributing to inflationary pressures. This has raised the risk of demand destruction. As a result, the share price of integrated oil and gas producers has retraced from 52-week highs set in early June 2022.
The demand side of the equation can have a more immediate response but longer-term supply remains tight. Investors can expect long-term global demand to outstrip supply.
This potential long-term imbalance stems from a host of factors which include:
- Investors wanting a reduction in CAPEX from historical levels with a greater return of free cash flow in the form of dividend increases and share buybacks;
- The reluctance on the part of oil and gas producers to invest in very costly projects over several years before any revenue is generated;
- Russia’s invasion of Ukraine that has upended global energy markets;
- Refining capacity in the US that is about a million barrels a day below what it was before the pandemic. US refineries have no spare capacity; and
- Chinese demand that will eventually ramp up once lockdowns ease.
We may continue to witness short-term weakness in the share price of integrated oil and gas producers. However, the long-term prognosis is clear. Major integrated oil and gas producers are likely to generate significant profits and free cash flow for at least the next few years.
In addition, XOM and Chevron Corporation (CVX) have very low net debt to capital ratios. This gives them the flexibility to raise debt which could be deployed toward share repurchases and/or dividend increases; this message was communicated earlier this year.
Final Thoughts
Both companies release their Q2 2022 results at the end of July. I expect them to report strong results and FY2022 guidance and the disclosure of significant share repurchases in Q2.
I recently completed my Mid 2022 Investment Holdings Review at which time CVX and XOM were my 3rd and 19th largest holdings; their respective share price has subsequently fallen which may have changed their ranking. Nevertheless, the valuation of both companies based on future earnings is currently attractive. I like their long-term outlook and, therefore, have been adding to my exposure to both companies on share price weakness.
Additional posts regarding these companies are accessible in the FFJ Archives.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long XOM and CVX.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
