On July 23rd, Seeking Alpha contributor Casey Hoerth wrote an article on Exxon Mobil (XOM) called "Exxon Mobil is Not a Great Choice". The article's thesis was that compared to the other companies named in the article, XOM was a poor investment choice because production growth prospects are less, the projected production growth is more dry gas than oil and the dividend will not grow as fast as the others. The article, although well documented, leaves out some important information and makes erroneous assumptions.
In this article, I will counter Mr. Hoerth's arguments and make the bullish case for XOM. Investors can then read both articles and make their own decision regarding the potential future returns of XOM. As Mr. Hoerth did in his article, I will compare XOM to Chevron (CVX), Occidental Petroleum (OXY) and ConocoPhillips (COP)
As stated in Mr. Hoerth's article, XOM's production growth, stated in percentages, is less than COP, CVX and OXY. However, just looking at percentages can be misleading. Below is a chart that shows 2012 production numbers for each company and projected 2017 production using the smaller of the numbers shown for percentage increase. For example, I used 2% for XOM, 4% for CVX, etc. The production numbers for 2012 were taken from 2012 Annual Reports, or from analyst presentations.
|Company||2012 Production Oil Equivalent Barrels per Day||Projected Yearly Production Increase||Additional oil equivalent barrels||2017 Projected Production|
So as you can see, XOM adds significantly more oil equivalent barrels a day than OXY or COP, but less than CVX. However, the thing to remember is that forecasted numbers do not always translate to real numbers. Looking at OXY's 1st quarter earnings report, we see OXY reported daily volumes of 763,000, down from 4th quarter volumes of 779,000. COP reported 1st quarter daily volumes of 1,596,000, down from 1st quarter 2012 volumes of 1,637,000. Chevron reported in its interim 2nd quarter update, that daily volumes were 2,569,000, which is down from both the 1st quarter 2013 and 4th quarter 2012 volumes. XOM, which has stated daily volumes would be down about 1% in 2013, reported that 1st quarter 2013 volumes declined to 4,395,000 from 1st quarter 2012 volumes of 4,553,000. However, the daily volumes of 4,395,000 were up from 4th quarter 2012 volumes of 4,296,000.
When judging various oil companies, production growth is one of several factors that should be weighed before making an investment decision. However, projecting volumes out to 2017 is a tricky business as many outside events can affect production. Geo-political issues, entitlement limits, maintenance shutdowns, weather, etc. can affect production.
Increasing production is nice, but what really matters is how much money a company makes off each barrel. As Mr. Hoerth mentioned in his article, XOM's Return on Invested Capital is significantly higher than the other companies. This is because XOM is a disciplined investor, spending money when returns look promising and because XOM squeezes every penny out of every barrel they produce. XOM's vast refining and chemical operations allows XOM to maximize its profit on each barrel.
Energy companies as part of their drilling activities will produce, oil, natural gas and natural-gas liquids, such as propane, butane and ethane. In terms of value, oil is generally the most profitable commodity followed by natural gas liquids and then natural gas. In Mr. Hoerth's article he stated
"So, on our growth-returns continuum, Exxon is far to the side of the latter. There's one other thing worth mentioning here. Exxon's growth and reserve replacement should be disproportionately natural gas. Oil and gas companies combine both oil and gas production and reserves into Barrels of Oil Equivalent (or mcf equivalent for gas-centered companies). This can cloud production and resource replacement numbers, especially if one commodity is relatively higher in value and less abundant than the other. Generally speaking, natural gas is much more abundant than oil right now, especially in North America. Due to their big XTO acquisition three years ago, Exxon's reserve replacement and production growth will be increasingly in dry, US gas. This concentration has yet to pay off.
Exxon's production growth lags well behind its peers. And as long as dry gas prices stay relatively low, the quality of Exxon's growth will also be less."
That statement I find to be essentially wrong. Exxon's reserve replacement will not be increasingly dry gas. Below is a quote from XOM's 2012 Reserve Replacement press release
"At year-end 2012, ExxonMobil's proved reserves totaled 25.2 billion oil-equivalent barrels, which was made up of 51 percent liquids and 49 percent natural gas. At year-end 2011, ExxonMobil's proved reserves base was 24.9 billion oil-equivalent barrels, made up of 49 percent liquids and 51 percent gas."
As you can see, in 2012, XOM's reserve replacement was not "increasingly dry gas" it was actually more liquids than dry gas. As was pointed out in the press release, XOM had a 174 percent replacement ratio for crude oil and other liquids.
When looking at future production growth, XOM at their 2013 Analyst Meeting stated they will add 1 million net oil equivalent barrels a day by 2017, 90% of which will be liquids. So the claim that XOM will be tied to low dry gas prices is, in my eyes, erroneous. XOM has vast resources and can develop them as markets dictate. As dry gas demand increases and most forecast call for dry gas demand growth, XOM will be able to develop the extensive dry gas resources they own. In the meantime, they are able to develop the liquid rich resource plays they also have.
In Mr. Hoerth's article he allocates a section to a discussion on dividends, but does not make any mention of share repurchases. I believe it is fairer to discuss total distribution to shareholders. As shareholders, we all want the company we own shares in to distribute some of those earnings back to us. Exxon Mobil distributes more cash back to shareholders than any of the other companies.
|Company||2012 Approximate Dividends Paid||2012 Approximate Share Repurchase||Total Annual Distribution|
Note1 - All figures are taken from 2012 Annual Reports or 2013 Shareholder Meetings.
Note 2 - I could not find actual total dividends paid in 2012 for CVX or COP, so I multiplied the annual dividend by shares outstanding to get approximate total dividends paid.
Note 3 - OXY in their 2012 Annual Report stated they paid $2.3 million to shareholders in 2012, of which $1.7 million was dividends. I then assumed $600 million in share repurchase.
Many writers have debated the value of share repurchase versus dividends. I myself like dividends, but also understand repurchasing shares, when done right, does add value. XOM's share count is approximately 4.5 billion. Buying back $20 billion of stock a year, at an average price of $93.00 means XOM buys back over 215 million shares a year. That reduced share count has a direct impact on earnings per share. In four-year's time, if XOM continues to repurchase shares at their current rate, XOM's share count will be approximately 3,640,000,000. If XOM earns $44 billion in 2017, which is the same amount they earned in 2012, their earnings per share would increase from 2012's $9.46 to $11.26, without any actual earnings increase. XOM currently sells at P/E of 9.5, apply a 9.5 P/E to earning per share of $11.26 and you get a stock price of $106.97. Stock repurchases do add value and should be considered when valuing companies.
In Mr. Hoerth's article he insinuates XOM may have difficulty increasing its dividend in-line with the other companies going forward. He states
"All four of these companies have an explicit commitment to dividends. But it takes earnings growth, and hence upstream production growth, to bring about dividend increases. So, while Exxon Mobil has at least kept up with Conoco and Chevron since 2006, that will be less likely going forward."
Using David Fish's excellent DRIP Investing Resource Center, I compiled the chart below to compare dividend history and payouts.
|Consecutive Years Dividend Increased||QTRLY Amount||Yield||EPS % Payout||3-Year % Increase||5-Year % Increase||10-Year % Increase|
Note - It should be noted that COP split into two companies in April, 2012, so historical numbers should be looked at in context.
As you can see in the chart above, XOM has been increasing its dividend for 31 straight years and XOM also has the lowest payout ratio of the four companies shown. In addition, XOM has been increasing its dividend at the approximate same rate as CVX. There simply is no reason to think XOM would be unable to continue to raise its dividend in-line with the other companies, as Mr. Hoerth suggested. In fact, I believe the numbers show XOM is likely to increase its dividend at a more rapid rate than it historically has.
Exxon Mobil with its AAA rated balance sheet, strong cash flows, unmatched shareholder distributions, and growing reserves is an outstanding investment choice for the long term investor. XOM has a number of large projects that will provide a significant increase in production between now and 2017 and also has the financial flexibility to continue to increase its dividend as well as buy-back billions of dollars of shares every year.
All of the four companies shown above are worthwhile investments, however, in my opinion, XOM stands alone for any investor seeking safety of principal and solid long term returns.