Exxon Mobil Is The Wrong Play For An Oil Rally, Raymond James Says In Downgrade

If Brent oil prices move to $90 a barrel in 2019, "just about everyone" will benefit — except for Exxon Mobil Corporation (NYSE: XOM), which is the "least appealing" play, according to Raymond James.

The Analyst

Analyst Pavel Molchanov downgraded Exxon Mobil from Market Perform to Underperform with no assigned price target.

The Thesis

Within the universe of mega-cap energy companies, Exxon has the second-lowest correlation to the movement of Brent prices, Molchanov said in the Tuesday downgrade note. (See his track record here.) 

The stock's R-squared, or statistical relationship between an asset and benchmark, over the past six years is just 0.43. Conversely, Italy-based Eni SpA (NYSE: E) has the highest R-squared to Brent at 0.91, the analyst said. 

Bulls may argue that Exxon remains a highly profitable company with expectations of a solid 7-percent free cash flow yield in 2019, Molchanov said. Yet this still falls short of the group median, and Exxon is among the only supermajors that does not use its cash flow to repurchase its stock, he said.  

Exxon may be in a position where it needs to notably ramp up spending across many assets to at the very least stabilize if not grow the business, the analyst said. 

Bulls are quick to point out that Exxon's refining segment is well-positioned to benefit from IMO 2020, Molchanov said. But the company's inferior upstream leverage to Brent "overshadows" the benefits of the high-complexity refining business, he said. 

Exxon's stock is trading at 11.5 times estimated 2019 EPS, which is well below the stock's average multiple of 16 times since 2000. The multiple is still among the highest of Exxon's peers and should prove difficult to sustain moving forward, according to Raymond James. 

Price Action

Exxon shares were down 2.06 percent at $77.59 at the time of publication Tuesday. 

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