The largest US oil producer, Exxon Mobil, is set to unveil its fourth quarter earnings on Tuesday, January 31, before Wall Street’s opening bell. The energy giant is likely to close the year on a solid note despite the significant declines in both oil and natural gas prices, which suggest that the energy sector’s earnings have most probably surpassed their peak. Hence, the big question that lies ahead is in which sustainable growth levers will all the accumulated cash flows from 2022 be invested and how much will be directed back to shareholders.

Spectacular year but slowdown looms

Energy stocks defied gravity during a devastating year for equity markets as the elevated oil and natural gas prices allowed them to generate huge profits. This rally in energy commodities stemmed from the supply cuts during the Covid-19 pandemic and the chronic under-investment in fossil fuels due to the intensifying global efforts for a quick transition towards clean energy. Aside from that, the Russian invasion of Ukraine and the consequent sanctions from Western allies on Russian energy exports caused the already elevated prices to spike further.

As supply issues moderated and uncertainty around the war eased, oil prices fell significantly in the fourth quarter of 2022, leading to potential declines in energy companies’ profitability and indicating that further upside potential for the sector is limited. Chevron’s earnings announcement on Friday validated those fears, with the company announcing earnings below consensus estimates and a cautious forward guidance. In response, oil companies are expected to announce generous increases in dividends and share repurchase programs to keep their stocks attractive. But can they really sustain those generous buybacks in periods of falling profits?

Fundamentals reflect upcoming weakness

Exxon Mobil is projected to exhibit solid revenue figures, albeit profits will probably suffer a minor dent due to declining energy prices. The energy behemoth is expected to post revenue of $94.67 billion for the fourth quarter, according to consensus estimates by Refinitiv IBES, which would represent a year-on-year growth of 11.42%. Earnings per share (EPS) are estimated to reach $3.29, marking a decrease of 1.85% on an annual basis.

Attractive valuations or low growth prospects?

Even though Exxon Mobil’s share price skyrocketed in 2022, its valuation remains substantially deflated, indicating that investors are not betting on its longer-term prospects. The 12-month forward price-to-earnings ratio, which denotes the dollar amount someone would need to invest to receive back one dollar in annual earnings, currently stands at 10.7x. This ratio seems relatively attractive against both the tech-heavy Nasdaq’s average multiple of 22.4x and the S&P 500’s 15.9x.

Even though someone could argue that the peak in earnings does not necessarily coincide with the stock price’s peak, it seems that investors have turned their back on non-sustainable and non-ESG growth opportunities. Moreover, oil giants are criticized for distributing so much money to shareholders but refusing to lower prices for the average consumer.  Therefore, the future of the sector lies in how efficiently energy corporations will invest their current cash surplus to generate energy from renewable and eco-friendly sources.

Technical levels to watch

Taking a technical look, Exxon Mobil’s price has stormed to a fresh all-time high in 2023 despite declining energy prices. Can this outperformance persist or are we heading towards a reversal?

If earnings surprise to the upside, bullish forces could propel the price towards its recent resistance region of $114.70. Successfully breaching that zone, the spotlight could shift towards the all-time high of $117.80.

On the flipside, should financial figures disappoint, the bears might aim for the $109.80 support, which overlaps with the 50-day simple moving average (SMA). A violation of the latter could send the price to test the December low of $102.30.