Exxon Mobil (XOM) is the biggest heavyweight in the world's Oil & Gas sector, and the second oil and gas stock that I have been researching.
Therefore, let's continue to explore whether Exxon Mobil currently offers as good a long-term buying opportunity as Chevron.
Interesting tidbits from Exxon Mobil's history
- Exxon Mobil is a direct descendant of the famous Standard Oil Company of John D. Rockefeller.
- It is the largest publicly traded company in the entire world by market cap. It is competing for this crown position with Apple (AAPL), and the race is so close that the pole position changes virtually every day with just a 1% change in the stock price of the contestants. Google (GOOG) is a distant holder of the third largest market cap spot.
- Exxon is also the world's largest public company measured by revenue. For this position, it competes with one of its main rivals and peers, the Royal Dutch Shell [(RDS.A),(RDS.B)]
Reasons to buy
1. Dominant Oil & Gas industry position
Exxon is the number one company in the Oil & Gas industry by market cap as well as by total sales. It has been building this position for many years, and it is not easy for newcomers to enter this industry, nor it is easy for the existing players do dethrone Exxon. I am confident Exxon Mobil will continue to maintain the highest position, or at least be among the top three strongest oil and gas companies of the world throughout the decades to come.
2. Balanced portfolio of energy activities and sources
Exxon Mobil has projects in all major energy-generating sources, including (of course) oil, natural gas, geothermal, solar and wind power, among others. This protects Exxon from future derailment caused by advancing or declining trends in prices and usage of certain energy-generation sources. One area where Exxon seems to be weaker is coal energy. Otherwise, it is well covered and prepared for potential changes in future trends.
3. Attractive valuation
In contrast to some of the overvalued run-for-safety stocks, Exxon Mobil is currently trading at a P/E of just 9.25.
In today's booming market, it is harder and harder every day to find reasonably priced, high-quality stocks. Most stock sectors seem to be overvalued. Johnson & Johnson (JNJ) at a P/E of 23.83 and expected future earnings growth rate of just 6.33% p.a. anyone? Thanks, but no thanks. JNJ is a great company, but I will pass up on the offer to buy at this price. If I was considering a purchase of Johnson & Johnson, I would rather own Google. It has just a slightly higher P/E of 26.91, but also incomparably higher future earnings growth prospects of over 15% p.a.
Exxon Mobil currently yields 2.76%. The dividend has been paid and steadily rising for over 40 years now, with just one slight hiccup in the summer of 2001, when XOM paid only one cent in June 2001 quarterly dividend. However, the rest of that year's dividends were back to normal levels. Moreover, XOM's very low payout ratio of 27% promises future dividend growth potential even if the organic earnings growth stalls.
5. Fundamental value
- Current Exxon Mobil share price is $90.7
- Trailing P/E is 9.23
- Forward P/E is 11.01
- PEG Ratio (5-yr expected) is 6.17
- Price/Sales is 0.97
- Price/Book is 2.41
6. Financial indicators
- Revenue: $413.86B
- Profit Margin: 10.86%
- Total Cash: $6.21B
- Total Debt: $13.41B
- Debt-to-equity ratio: 0.08
- Operating Cash Flow: $50.48B
- Return on Assets: 10.17%
- Return on Equity: 28.26%
The risks and challenges
1. Warren Buffett sold Exxon Mobil in Q4 2011
Although this might not be the major risk to the stock, Berkshire Hathaway's [(BRK.A),(BRK.B)] sale definitely drew attention, and could influence investors' view of the stock; betting against Berkshire seldom pays off. On the other hand, this can be a buying opportunity while the stock might be slightly undervalued as a result of this negative sentiment.
Moreover, Buffett might have had many other reasons for selling his stake which might not have been related to the health of the company or its future prospects. Nevertheless, Buffett seems to favor ConocoPhillips (COP) and Phillips 66 (PSX) in the Integrated Oil & Gas arena for the time being.
2. Natural gas boom
As the 18th century was the century of steam and industrial revolution powered predominantly by coal, the 20th century can be described as the age of oil. Now, in the first half of the 21st century, one can say that mankind is entering the age of natural gas.
Natural gas production has been blossoming. Even such means of transport as railways can use natural gas to power the locomotives. In fact, Warren Buffett announced in March that he is planning to completely overhaul BNSF diesel trains to run on natural gas.
3. Price of oil could stagnate or fall on industry changes
They say that oil is black gold. If this is true, troubles could be brewing for oil, as gold has no intrinsic value, no regular stream of income. There is simply no margin of safety. Its price could fall by 80%, down to where it was just over a decade ago.
Similarly, such a dramatic price fall could happen to oil. As a matter of fact, it already did, during the 2008-2009 turmoil, when its price per barrel dove from its peak just shy of $150 all the way down to the $30s, or 80% off from its peak and 65% down from its current levels.
There are other competing energy sources, such as natural gas, solar, wind, and even the most cost-effective source of energy, nuclear power. Nevertheless, nuclear energy is the cheapest source of energy only until a really ugly black swan event happens.
This logic of looking at nuclear energy as being cheap reminds me of the well-known options trading strategy, one of the most basic after covered call writing, the selling of out-of-money naked puts (or even worse, selling of naked calls). It can be steadily profitable for a very long time, until a nasty outlier event of multiple sigma-magnitude happens and wipes out all the previous profits and takes away much more.
The morale of this thought is that investors should always expect the unexpected and not take anything for granted. In the case of oil, its price could easily stagnate or even drop over the next ten years. So, we always have to look at the strength of individual companies, how diversified they are, how flexible, and how they are exploring new industry trends and alternative energy sources, to stay ahead of the curve and be ready for the future changes in the energy industry.
I am confident that Exxon Mobil is one such company that will be able to weather future energy storms and navigate the high waters and deep waters of oil and gas exploration, production, refining and sales.
Exxon's attractive valuation and strong industry position offer an interesting investment opportunity for investors who are more risk-tolerant within the general Dow Jones Industrial Average (DIA) dividend stocks.
I will start buying small amounts of Exxon stock in the upcoming months, starting now. I recommend spreading the purchases over many months to avoid buying uncomfortably close to the possible current 4-year bull market peak.