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Shares of Exxon Mobil (NYSE:XOM) ended the past trading week on a positive note after the oil major received an upgrade from Raymond James.

After shares have seen a 10% correction from July's highs, Exxon looks attractive for investors looking for a decent long term investment in any well-diversified investment portfolio.

Broker Upgrade

Before the market opening, analysts at Raymond James issued a positive update on Exxon Mobil. Analyst Pavel Molchanov raised his recommendation for the company from "outperform" to "strong buy".

According to Molchanov, shares have missed out on the gains in the energy sector and the wider stock market. The decision to reduce stock repurchases twice this year has weighted on shares.

At the same time, some of Exxon's capital-intensive projects come close to completion which should free up some capital. If Exxon could use these free cash flows to boost the pace of share repurchases again, shares could see a new boost.

The price target of $98 per share was maintained.

Valuation

Exxon Mobil ended its second quarter with $4.6 billion in cash and equivalents. Total debt stood at $19.4 billion, resulting in a net debt position of $15 billion.

Total revenues for the first six months of the year came in at $215.3 billion, down 14.4% on the year before. Net earnings fell by 35.5% in the meantime to $16.4 billion. A simple extrapolation of these results would result in annual revenues of around $430 billion and annual earnings of around $33 billion

Trading around $86 per share, the market values Exxon at around $378 billion. This values operating assets around 0.9 times annual revenues and 11-12 times annual earnings.

Exxon Mobil currently pays a quarterly dividend of $0.63 per share, for an annual dividend yield of 2.9%.

Some Historical Perspective

Over the past decade, shares of Exxon Mobil have risen from levels around $35 in 2004 to highs in the mid-nineties by 2007 and 2008. Shares have fallen towards $60 in 2010, to recover to fresh highs around $95 in July of this year. Ever since, shares have seen a 10% correction, currently exchanging hands at $86 per share.

Between the calendar year of 2009 and 2012, Exxon has increased its annual revenues by more than 50% to $467 billion in 2012. Net earnings more than doubled to $45 billion in the meantime, although earnings and revenues stand to show a meaningful correction in 2013.

Note that the company furthermore retired roughly 10% of its shares outstanding in the meantime, adding to earnings per share growth.

Investment Thesis

Back in August, Exxon released a disappointing set of quarterly results which revealed that the refining business of the oil firm was performing worse than previously anticipated.

On the back of these results, shares have fallen some 10% from July to the end of August. Lower oil and gas production and refining weakness were to blame. Earnings for the second quarter came in at $6.9 billion, down sharply from $15.9 billion a year earlier. Note that second quarter earnings in 2012, included $5.3 billion in one-time gains.

One of Exxon's key struggles, like many oil majors, is too keep total oil and gas production at similar levels. Actually Exxon is reporting declining production levels at the moment, as total oil-equivalent production fell by 1.9% to 4.07 million barrels over the quarter.

To offset declining production growth, Exxon Mobil is boosting capital expenditures in international markets, in an effort to restore growth. This does actually increase the risk profile of the company a bit, as Russia, Liberia and Iraq, which are key growth markets are not the most stable geo-political areas. Exxon has already invested tens of billions in recent years, but investments were steered towards natural gas investments. These haven't paid off as much as planned given the lower natural gas prices.

As a result, Exxon is taking measures to preserve cash while boosting capital expenditures. Analyst Molchanov said the reduction in share repurchases, to $3 billion a quarter, was prudent given the volatility in prices and the capital needs for projects. That being said he noted that repurchase activity could accelerate once projects come online, and capital expenditure requirements decline.

The cutback in the pace of share repurchases implies that Exxon will spend some $12 billion per annum repurchasing its own shares, down from $20 billion in recent years. At the same time, the current quarterly dividend of $0.63 remains intact, implying that Exxon returns another $11 billion to shareholders. All in all, Exxon returns some $23 billion per annum to its shareholders, some 6% of its current market capitalization.

Exxon made the decision to lower the total payout ratio as earnings are disappointing, based on moderate prices, poor refining earnings and lack of growth. The 40% cutback in share repurchases is severe and is the most cited reasons for the disappointing share price performance, especially compared to some of its competitors.

Exxon is a core holding for many shareholders across the US, which has created a valuation premium to other oil majors. On the back of the recent correction, shares might offer some value now. Note that Exxon trades at premium earnings multiples, like it always has done. The 6% combined yield from dividends and repurchases should be attractive enough at the moment, as the company is making good efforts to stabilize production, and to grow again going forwards.

Back in November of 2012, I last took a look at Exxon's prospects. I concluded that the oil major has seen stagnating share returns, on the back of struggling production rates. At the same time, the 2.5% dividend yield at the time, which has increased to 2.9% at the moment, does not make Exxon among the top payers in the industry, nor does the company have great growth potential. The big advantage of Exxon is the rather strong balance sheet, with a very limited net debt position.

I reiterate my stance. Shares of Exxon Mobil are an excellent addition to any long term diversified portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Exxon Mobil - Recent 10% Correction Offers A Nice Entry Opportunity