Exxon Mobil (XOM) lost significant market value Friday after it was hit by the double whammy of a rating downgrade and drop in oil prices. In its latest investor day presentation, the company discussed in detail its plan to continue investing heavily in natural gas resources. However, brokerage firm Cowen & Company was not convinced as it believed the $30-35 billion investment might not bring the expected returns to shareholders.
According to the analyst, though the company’s “counter-cyclical investment” plan could bring long-term benefits, it is unlikely to impress the investors now. The stock was downgraded to market perform from outperform.
The analyst claimed that the decision to continue spending in hydrocarbon assets at the current level, as explained by Exxon CEO Darren Woods, will affect the cash flow severely. Consequently, the company might lose the market cap in the coming years. The analyst also lowered the twelve-month price target on the stock sharply to $75 from $100.
Coincidently, the downgrade came on a day when crude oil prices in the US hit a near-term low of $55 per barrel on Friday, which made Exxon Mobil’s aggressive investment plan look less feasible. Interestingly, the company’s peers are trimming investments in view of the dip in oil prices.
The analyst claimed the decision to continue spending in natural gas assets at the current level will affect the cash flow significantly
The analyst suggested that Exxon Mobil should continue to increase its dividend to create meaningful shareholder value, but not necessarily at the current annual rate of 5%.
Exxon Mobil’s management is currently looking for capital spending of $30 billion this year, $33 -$35 billion next year and $30-$35 billion in the coming five years. Earlier this week, the DOW component had issued a bullish statement on its cash generation goals and achieving profit-growth.
Last month the Irving, Texas-based energy giant posted a 28% fall in its fourth-quarter earnings to $1.41 per share, hurt by charges related to tax reform and impairments. However, adjusted earnings surged 72% on an 8% growth in revenues to $71.9 billion.
The stock started Friday’s trading sharply lower, and remained down throughout the session, less than a week after suffering a similar loss. The shares have gained more than 15% since they fell to an 8-year low towards the end of last year.