Seeking Alpha
Long/short equity, value, deep value
Profile| Send Message|
( followers)  

The energy giant Exxon Mobil Corporation (NYSE:XOM) is a great company in several respects, from its solid financial position, high return on equity, healthy dividends, well managed debt-to-equity, growth in earnings per share to proved reserves of 25.2 billion barrels oil-equivalent. The company's performance remains strong, having seen minimal fallout from the global economic slowdown.

However, if we talk about its low points, there are rising costs and relatively low levels of production. The company witnessed weakening operating cash flows, which declined by almost 30% to $13.6 billion year-over-year in 1Q 2013. Although its debt-to-equity ratio is low, the company's quick ratio is around 0.6 times, which might be a setback for short-term liquidity.

The company did not perform well in its core revenue segment i.e. oil and gas production in 1Q results. The higher production and lower commodity and raw material costs boosted the earnings of the Supermajor's chemical and refining operations, but it constitutes only 17% of Exxon's total business.

Future growth

To regain its production growth, the company has signed an agreement with its joint venture partner Qatar Petroleum to construct a $10 billion natural gas export terminal in Texas to market natural gas resources from the U.S. to international markets. The expected capacity of this terminal is 15.6 million tons/year or 2.8 Bcf/day. In April 2013, the company entered into a partnership with BHP Billiton to establish a floating liquefied natural gas barge in the Scarborough gas field off the western Australian coast.

The company recently announced production startup at the Kearl Oil Sands project with an initial phase production of 110,000 barrels/day. Over the next 40 years, the production is expected to reach at 4.6 billion barrels.

Since Exxon is a diversified company, the low oil and gas prices will improve the refining and chemical margins. Natural gas prices are expected to improve which will directly improve the gas revenue of the company.

Exxon is the second-largest dividend payer with a dividend yield of 2.77% in the S&P 500 index after Apple Inc. In Q1 2013, Exxon company spent some $7.6 billion to pay dividends and to repurchase shares. For Q2 2013, it has announced plans to buy back $4 billion of its stock. On the whole, Exxon is a shareholder-friendly company.

Exxon's CEO stated in an analyst meeting that production is expected to increase by one million barrels per day by 2017. This means the current production level will increase by ~23%, which is quite promising.

Competitive environment

XOM primarily compete with other Supermajors ConocoPhillips (NYSE:COP) and Chevron (NYSE:CVX). Conoco has a geographically diverse oil/gas portfolio. The company has witnessed a fall in revenue growth over the past 3 years, which has been a result of weak oil and gas prices and the recent spinoff of Phillips 66 (NYSE:PSX). With this spinoff, Conoco is expected to focus on its core revenue driver, exploration and production. Excellent dividend yield, steady earnings and proposed future projects makes the stock lucrative. Chevron showcases a promising production outlook, but its downstream operations are expected to be low in the near term.

Peer Group Comparison

XOM

COP

CVX

Industry

Market Cap ($ Billion)

405.7

76.3

238.5

-

Revenue (TTM) ($ Billion)

413.9

59.8

217.7

-

EPS ($)

9.8

6.2

13.2

3.8

Price to Earnings

9.3

10.1

9.3

10.2

PEG (5 yr expected)

6.2

2.8

6.3

1.3

Price to Sales (TTN)

1.0

1.3

1.1

0.5

Annualized dividend ($)

2.5

2.6

4.0

-

Yield (%)

2.8

4.2

3.2

-

From a P/E and P/S standpoint, Exxon is one of the cheapest stocks in the industry. Although Exxon's dividend yield remains below other major peers, I take solace in knowing that its robust cash position and solid balance sheet can support future dividend hikes.

Even when the oil and gas sector demands a high level of capital expenditure, Exxon maintains a debt-to-equity ratio of 0.08, which is way below that of the industry average. This shows the efficiency of the management at debt levels. When compared to its peer group, Exxon's return on capital employed at 25% exceeds that of the industry average as well as the S&P 500 index.

Digging a bit deeper, Exxon has a P/E ratio of 9.3, which is below the industry P/E ratio of 10.5. Meanwhile, analysts do expect company to trade at a P/E of 11.5 forward earnings

Conclusion

The industry is faced with a weak economy, low crude oil prices and limited rigs; therefore, all upstream players are struggling with soft productions. Exxon is no exception. Despite the not-so-good financial and market performance, Exxon remains a market favorite. Its historical return on capital and strong dividends are unmatchable. The company is an interesting buy at current levels and the planned buy back will enhance the value of the stock and the existing investors will be rewarded with a very solid dividend. But keep an eye on operating profits and cash flows.

Source: This Supermajor Is Down But Not Out