With crude oil prices down from about $70 at the beginning of the year to about $60 at the moment, stocks in oil majors may look less attractive to investors than they have for the past few years. Exxon, however, has managed to hold its own during this difficult period. Are lower oil prices bad for Exxon, and how could the business hold up if prices remain depressed?
Exxon’s Low-Cost Extraction Advantage
While things may look a bit bleak for oil prices, Exxon is performing surprisingly well as a result of its ability to extract oil at attractively low prices. A key driver of this capability has been Exxon’s new and growing offshore oil operation in Guyana. The Stabroek Block, an enormous reserve of oil and gas off the coast of Guyana where Exxon has a considerable interest, offers a breakeven cost of roughly $30 per barrel, far below even today’s stagnant oil prices. Thanks to its large stake in the emerging Guyana oil fields, Exxon will have access to massive amounts of low-cost oil for the foreseeable future.
Guyana, however, isn’t the only cost-advantaged oil field in Exxon’s portfolio. The Permian Basin fields in the United States also offer relatively low extraction costs, and Exxon’s exposure there has more than doubled since last year through ongoing acquisitions. This large domestic production presence in the United States also gives Exxon a degree of insulation from the increasing uncertainty around import tariffs into the US.
How Is Exxon’s Financial Performance Holding Up?
Far from being a small advantage over its competition, Exxon’s low breakeven point has allowed it to stay afloat in a challenging market for oil and gas businesses. Earnings in Q3 totaled $7.5 billion, down from the year-ago quarter but up from the $7.1 billion Exxon delivered in Q2. Earnings per share for the full year to date are also down from the first nine months of 2024, falling from $6.12 to $5.16.
Even with lower earnings being reported, it’s important to recognize that Exxon has maintained fairly strong profitability in a very difficult market. Net margin over the trailing 12-month period has been 9.6 percent. For reference, compare this margin to Exxon peer and noted Warren Buffett favorite Occidental Petroleum, which has delivered a lower margin of 8.8 percent over the same period.
Cash flow has been another strong suit for Exxon, with $14.8 billion in just the third quarter. Free cash flow YTD has come in above $20 billion, all while Exxon has also pursued major cost cuts. Since 2019, the business has been able to save more than $14 billion by more carefully managing its expenses, and about $2.2 billion in savings are expected in 2025.
How Do Exxon’s Valuation and Dividend Look?
Exxon also may appeal to investors both for its valuation and for its ability to generate dividend income. XOM shares trade at 16.5 times trailing 12-month earnings and 1.5 times sales. While this does represent a significant premium when compared to sector averages, Exxon’s cost advantages may actually make it a more attractive value buy than some of its lower-priced peers. The average analyst price target for XOM at the moment is $127.24, implying an upside of almost 12 percent from the most recent price of $114.50.
While waiting for a period of higher oil prices, investors can also take advantage of Exxon’s 3.5 percent dividend yield, which is more than double the average of the S&P 500 at the moment. Beyond just its dividend, Exxon is also using the current climate as an opportunity to return cash to its shareholders via share buybacks. In Q3 alone, management repurchased over $5 billion of XOM shares.
Is Oil Due for a Rebound?
Another question for investors in Exxon or any other oil major is whether or not oil prices could rise in the near future. Unfortunately, the outlook for 2026’s prices remains fairly negative. Average prices are projected to fall even further next year, reaching an estimated $52 per barrel.
The good news for Exxon is that the business can likely perform well even under these deeply adverse conditions. Even with prices in the $50 range, oil from the low-cost operations Exxon has developed can still be profitable. Exxon is also working to increase its output from these wells, with Q3 output from Guyana reaching a record of 700,000 barrels per day. The Permian Basin similarly set a record last quarter at 1.7 million barrels per day. Crucially, Exxon is deploying proprietary methods to increase Permian Basin recoveries by about 20 percent while also acquiring more acreage in the Basin.
Are Lower Oil Prices Bad for Exxon?
While it’s impossible to say that lower prices are good for Exxon, the business seems to be standing up well under pricing pressures. Exxon could also be a major beneficiary when oil prices eventually do rebound, as its lower costs could help it achieve significantly higher margins on future revenues. Between this fact and the ongoing share buybacks, analysts are expecting Exxon to deliver compounded EPS growth of almost 11 percent over the next 3-5 years.
In the long run, cyclical changes in oil prices will likely do little lasting harm to Exxon as a business. With its cost-advantaged wells and already strong performance, Exxon still appears to be a potentially good business to own for long-term returns in oil and gas. The development of projects in the Permian Basin and Guyana positions Exxon extremely well to be able to produce profitably within a wide range of price conditions.
Considering these facts, Exxon still looks like a decent stock to buy in spite of pricing pressures. This could be especially true for dividend investors, as Exxon will likely be able to keep returning cash to its shareholders at a relatively rapid pace for the foreseeable future. Though lower oil prices may be putting some temporary pressure on the stock, Exxon’s competitive advantages and massive existing market presence could both make it a good stock to look at for buy-and-hold investors with a bit of tolerance for short-term macro challenges.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.