Exxon Mobil received another vote of confidence on Monday, continuing a recent positive streak for a company that had few bright spots in 2020.
Morgan Stanley analyst Devin McDermott raised his rating on the stock to Overweight from Equal Weight and wrote that the stock could return 30% after including dividends. His price target is $57. Exxon (ticker: XOM) was up 1.7% on Monday, to $46.22.
McDermott thinks the company’s cost-cutting and its decision to hold back on capital spending for the next several years will allow it to avoid a dividend reduction. The company has fallen far short of covering the dividend with free cash flow for the past two years—forcing the company to take on more debt—but McDermott thinks that will change in 2021.
Last year, the market appeared to be pricing in a dividend cut, based on options trading and the fact that Exxon’s yield exceeded 10%—usually a danger sign. Its dividend yield is now 7.5%.
Exxon stock has risen more than 40% since it traded in the low $30s in late October. Since then, the outlook for oil has improved considerably, and several analysts have raised their ratings on Exxon on the theory that it will gain more than competitors given that it trailed for so long. McDermott notes that Exxon has trailed Chevron (CVX) by 50% for the past five years, but he expects it to retake the lead in 2021.
The larger picture for oil is brightening, as Saudi Arabia surprised investors last week by announcing that it would unilaterally reduce production by 1 million barrels starting in February. Brent crude futures, the global benchmark, have risen 9% in the past two weeks. On Monday, they were down 0.7%, to $55.60 a barrel.
Goldman Sachs, which has been more bullish on oil prices than other banks, now thinks Brent crude could reach $65 a barrel by the middle of the year. Morgan Stanley expects $60 Brent in the second half of 2021.
Those are both above consensus estimates. If oil prices don’t keep rising to those levels, McDermott’s prediction that Exxon can cover its dividend from its free cash flow this year could fall short.
Write to Avi Salzman at [email protected]
