Exxon Mobil (XOM)
With the market continuing a two-week losing streak, investors have begun to focus on conservative, defensive plays which are currently undervalued. While a new position in oil stocks may not seem to be the most prudent move, especially with a possible cut in gas prices this week, the largest company in America by market capitalization, Exxon Mobil, has become far too undervalued to be ignored.
Exxon Mobil is the market leader of the six largest petroleum companies in the world – British Petroleum (BP: Charts, News, Offers), Chevron Texaco (CVX: Charts, News, Offers), Total (TOT: Charts, News, Offers), Conoco Phillips (COP: Charts, News, Offers) and Royal Dutch Shell (RDS.A: Charts, News, Offers). Exxon Mobil has consistently generated the highest revenue and income of the six.
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Stock Analysis
In Exxon Mobil’s (
XOM:
Charts,
News,
Offers) most recent earnings report, net income doubled to $7.56 billion, with a 24% revenue increase to $92.5 billion compared to the second quarter of 2009. The stock price, however, has plunged amid an unfavorable forecast for the demand of crude oil due to the BP disaster and an uncertain industrial outlook. The stock now trades with a forward P/E of 8.8 with a PEG ratio of 0.67. In additional to those technically undervalued signals, it also yields a 2.9% 0.44 quarterly dividend. It returned 16.3% on employed capital in 2009. The stock price has been cut down dramatically, at first due to falling oil prices and then exacerbated by the BP disaster in the Gulf of Mexico. Exxon Mobil has limited exposure in the Gulf of Mexico, with global operations spanning Africa, the Middle East and Asia.
Exxon Mobil’s earnings come from three main divisions: upstream, downstream and chemicals. The upstream division is responsible for the exploration and production of oil and natural gas. Its main assets are in the U.S., Russia and the Caspian Sea, bringing in 88% of Exxon’s 2009 revenue with 17 billion. The downstream division refines and markets oil, which turns the crude gathered from the upstream and refines it into usable oil products, like gasoline, diesel oil and jet fuel. It brought in 1.8 billion, or 9% revenue in 2009. Its chemicals division, which creates petrochemicals and plastics, brought in 12% of the total revenue with 2.3 billion.
It’s worth noting that Exxon and Mobil gas stations are no longer owned by the company. These were sold off to individual owners in 2008 as a way to cut losses during the economic meltdown. However, the gas stations must still pay licensing fees and buy their oil products from Exxon Mobil, so the gas stations are still profitable for the company without the final profit from consumer resale.
Its acquisition of natural shale gas producer XTO Energy for a massive $41 billion all stock deal increased Exxon’s resource base by 10%, but significantly diluted common shares. Fossil fuels, Exxon’s bottom line, are still forecast to continue supplying 80% of the world’s energy through 2030, as demand increases by 35%. Developing markets, in which Exxon is spread widely, are expected to fuel much of this energy demand. Exxon has also identified biofuels as gaining long term favor and has since branched out into
researching and creating algae biofuels.
Despite falling revenue due to oil prices, Exxon Mobil has continually expanded by increasing its capital expenditures on investments, expansion and acquisitions, planning to spend up to $150 billion in the next 5 years. Most recently, on August 19, the government of Ghana blocked Exxon’s attempted $4 billion buyout of Kosmos Energy’s 23% stake in the Jubilee oil field, which is estimated to contain up to 1.8 billion barrels of oil and slated to start producing 120,000 barrels per day by 2011. This field has attracted Chinese investors and BP, and signals a lost opportunity to further expand its operations in the African region, as Jubilee is the first major oil field in Ghana. While this is disappointing, it has little impact on Exxon’s profitability in the global arena.
Despite these share diluting practices, Exxon has proved to shareholders year after year that it intends to maximize shareholder value through repurchases. In the past three years, Exxon has spent an average of $30 billion per year on share repurchases. In addition, their dividend has increased steadily year after year, earning them the favor of dividend income investors. This latest pullback in crude prices has offered patient, dividend reinvesting investors a unique opportunity to invest in one of the most profitable energy companies in the world, before the next leg up as developing countries and emerging markets (BRIC and beyond) gain ground and increase the global demand for energy significantly. These countries won’t be immediately looking for the cleanest, most renewable resources like wind and solar – they’ll be using oil and natural gas. ExxonMobil is setting its pieces up all over the board, and will prove to be a very profitable long term investment when that day comes.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the
Stock of the Day analysis.
