Goldman downgrades Exxon to sell, says there's no 'compelling case' to own the stock

Published Mon, Feb 3 20208:23 AM ESTUpdated Mon, Feb 3 20204:41 PM EST

(This story is for CNBC PRO subscribers only.) Following Exxon's disappointing fourth quarter earnings results , Goldman Sachs downgraded the stock to a sell rating Monday, saying "more compelling returns opportunities exist both among the global majors and global large cap stocks outside of energy." The firm pointed to Exxon's lack of free cash flow that will limit capital returns, as well as an elevated valuation relative to peers as reasons behind the downgrade. Analyst Neil Mehta also cut his target on Exxon from $72 to $59, which is 5% below where the stock closed Friday. On Friday shares of Exxon slid 4% after the company reported fourth quarter results that missed estimates. The oil giant earned 41 cents per share, not including a one-time boost from items such as its Norway divestment, which was below the $1.41 per share earned in the same quarter a year earlier. The company's profits were hurt by weakness in its chemicals unit, as well as "significantly lower" margins in its refining division. Mehta said the company will continue to face a challenging landscape given the firm's expectation of lower crude and natural gas prices. "We see downstream and natural gas prices pressuring medium-term earnings power," he wrote in a note to clients Monday, adding "we believe the reinvestment rate is high, limiting room to return incremental capital beyond the dividend." He also said that shares trade at a "significant premium" relative to peers, and that the "free cash flow yield versus US and global oils has widened out significantly." Mehta also said that the company's growth trajectory in the key Permian region "faces challenges," and might require "higher capital intensity." Finally, he noted that in addition to lower oil prices, the company faces challenges from the growing ESG and sustainable investing movement. "In an environment where generalist investors are less willing to own energy equities for a number of reasons, from earnings execution to macro risk to ESG, we do not see a compelling case to own XOM relative to other energy stocks with more attractive returns profiles." Shares of Exxon fell 2.2 Monday's trading session. - CNBC's Michael Bloom contributed to this report.

Oil storage tanks and refining facilities sit at the Esso oil refinery, operated by Exxon Mobil Corp. in Fawley, U.K.

Simon Dawson | Bloomberg | Getty Images

(This story is for CNBC PRO subscribers only.)

Following Exxon's disappointing fourth quarter earnings results, Goldman Sachs downgraded the stock to a sell rating Monday, saying "more compelling returns opportunities exist both among the global majors and global large cap stocks outside of energy."

The firm pointed to Exxon's lack of free cash flow that will limit capital returns, as well as an elevated valuation relative to peers as reasons behind the downgrade. Analyst Neil Mehta also cut his target on Exxon from $72 to $59, which is 5% below where the stock closed Friday.