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Update on my investment in Exxon Mobil (NYSE:XOM)

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Exxon Mobil (NYSE:XOM) reported record third-quarter earnings on strong product prices and energy supply fears related to the war in Eastern Europe between Russia and Ukraine in February. Shares of Exxon Mobil are up 87% year to date, and the company recently offered shareholders a 3.4% dividend increase. Given the high share price and very favorable market environment, I have decided to take a profit and sell all of my XOM shares at current strength!

Data by YCharts

Exxon Mobil posts record profit on rising natural gas prices

Exxon Mobil is a big winner this year due to the revaluation of petroleum and natural gas products in the energy markets. The main event that triggered an upward revaluation of Exxon Mobil stock was the start of the war in Eastern Europe that continues to this day.

The war caused serious fears about sufficient energy supplies in Europe, and as a result Western countries quickly imposed sanctions on the Russian energy sector. All this, and the attack on the Nord Stream 1 pipeline in the Baltic Sea in October resulted in a huge increase in the price of oil and natural gas. The price of crude oil is currently at $87 per barrel, much higher than the five-year average of $64 per barrel.

Data by YCharts

Exxon Mobil has benefited greatly from expectations of increased supply in fiscal 2022, resulting in higher real prices and production profits for the company. In the third quarter, Exxon Mobil’s actual natural gas price rose to $8.38/ccf, an increase of 152% over the same period last year. Petroleum prices also remained strong, with Exxon Mobil’s true price of crude oil improving 36% year-over-year in the third quarter of 2022 to $91.69 a barrel. Although petroleum prices were still higher than normal, they fell 15% from a high of $107.78 a barrel in the second quarter.

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Source: Exxon Mobil

Thanks to better pricing conditions, especially with regard to natural gas, Exxon Mobil posted record profits in the third quarter. Higher gas prices alone boosted Exxon Mobil’s third-quarter results by $2.0 billion, and the energy company reported a total of $11.8 billion in adjusted manufacturing profits. Although Exxon Mobil’s Ehsaas Petroleum prices fell quarter-on-quarter 3’22, an increase in natural gas prices offset the decline.

Source: Exxon Mobil

However, Exxon Mobil’s earnings jump is driven almost entirely by price, not volume gains. Both liquefied gas and natural gas production have barely changed year-over-year, meaning that Exxon Mobil is completely dependent on strong market prices for its energy products. Liquefied petroleum production rose just 3% year-on-year in the third quarter of 2022, while Exxon Mobil’s natural gas production fell 2% as energy companies find it more difficult to obtain the necessary permits needed to expand their production base. expand.

Source: Exxon Mobil

Outlook and assessment

The short-term outlook for Exxon Mobil remains positive with energy markets dominating energy markets in the run-up to winter. I expect Exxon Mobil to generate between $60-62 billion in free cash flow in fiscal 2022 and $45-50 billion in fiscal 2023.

However, I believe there is nothing wrong with taking profits if an investment has performed well and exceeded expectations. Given the growing risk of a global economic contraction in fiscal 2023 — and with it the prospect of declining energy demand — Exxon Mobil stock may now appear cheaper than it actually is. Currently, shares of XOM are trading at a P/E ratio of 10X and a P/FCF ratio of 8X, but if energy prices return to normal (which it will eventually), Exxon Mobil could experience a serious downside reset. can look at the EPS estimate…and a higher P/E ratio with that.

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Data by YCharts

Risks at Exxon Mobil

The biggest risk to Exxon Mobil, as I mentioned earlier, is weak product pricing, particularly for natural gas, which could lead to a major downward revaluation of Exxon Mobil stock. The company also faces a hostile regulatory environment that discourages investment in the fossil fuel industry. If the US government continues to hamper the manufacturing sector, Exxon Mobil’s growth prospects could be adversely affected. A slowing economy, which the market now expects for fiscal 2023, is also a major risk factor for Exxon Mobil as energy demand could fall sharply next year.

final thoughts

I’ve nearly doubled my investment in Exxon Mobil and while I like Exxon Mobil’s near-term outlook, I believe now is a good time to sell strongly. As long as raw material prices remain high, especially natural gas, the manufacturing company has good earnings prospects, but weak product prices will have an immediate negative impact on Exxon Mobil’s revenues and free cash flow. As I become more cautious about a potential recession (and its effect on property prices) next year, I’m closing in on a successful and profitable investment!

Source: seekalpha.com

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