Exxon Mobil (NYSE:XOM) stock has stayed in a consistent trading range throughout 2013 between $85 and $96 per share. Since the summer of 2012 the stock has mostly cycled up and down within this range. Once the highest valued publicly traded company in the world, the oil leader still seems to be a safe investment for the near term, although some investors believe it is becoming a value trap due to struggling cash flow.
Oil's Stagnant Empire
Even though one of its biggest losses ever was with oil during the 2009 market crash, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) has made an SEC filing purchasing 40 million shares of XOM in November. This purchase makes Exxon Mobil the seventh biggest holding for Warren Buffett's company. The reason this move is puzzling is because the oil giant has not increased oil production much in the past five years and is only expected to grow incrementally over the next five years. Both competitors Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) and Chevron (NYSE:CVX) are expected to increase production by wider margins. It appears that the Buffett thesis is based on the fact that Exxon only allocates capital to highly profitable ventures and gives excess cash back to shareholders through dividends and repurchasing.
The Buffett news lifted the stock about three dollars, settling between $95 and $96 per share. The stock trades about 12 times earnings but may be overpriced when you consider that oil has been overpriced for several years. Compared with ConocoPhillips (NYSE:COP) in terms of operating margin, Exxon Mobil is under performing while Conoco stock lags. There's a certain flatness that remains consistent across the oil sector in each matchup. But Exxon has edges in diversity and buybacks.
Cash Flow Issues
Kynikos Associates hedge fund manager Jim Chanos, who is always looking for a good short, said at a recent Reuters Summit that he believes Exxon Mobil is becoming a value trap because cash flow is not as good as it used to be. He thinks that buybacks and dividends can only go so far while cash flow is becoming a growing concern. Chanos is one of the most successful short sellers in the world and observes that returns are not improving for Exxon shareholders. The stock has lagged the S&P 500 this year, so the buybacks and dividends haven't helped very much. Chanos is bearish on other national oil companies as well. He says that costs for oil exploration are "through the roof" and that the economics of oil are "clearly deteriorating," which limits growth potential.
Steady Fundamentals and Increased Spending
The balance sheet for Exxon Mobil has been steady throughout 2013 with both climbing assets and liabilities. There is nothing alarming on the balance sheet either on a quarterly or annual basis while the income statement has been equally stable. The company reported third quarter revenue fell from the previous Q3 $115.1 billion to $112.4 billion. Higher drilling costs combined with lower oil collection has caused a slowdown in production, while net profit fell from $9.57 billion to $7.78 billion, but the company still beat analyst expectations.
The only big concern one might have when thinking about the future of oil in general is that spending has increased exponentially this century compared with last century. A study by Barclays reveals from 1985 to 1999 the global oil industry increased production by 25 percent as spending grew by 40 percent. Yet since 1999 production has grown by the same amount yet spending has skyrocketed to 640 percent.
Getting Out of Hong Kong
After nearly 50 years in the electricity business, Exxon Mobil sold off a majority of its final standalone electricity unit, coal-powered Hong Kong utility Castle Peak Power, to two separate companies for $3.4 billion. Exxon called the sale a routine global portfolio assessment as the proceeds will be used to increase cash flow for capital spending, dividends and buybacks. In the third quarter of 2013 the company widened its debt by $2 billion. In recent years the company has decreased its spending on buybacks but still spent $3 billion in the third quarter.
The narrow range see-saw moves of Exxon Mobil have widened a bit since the second quarter, but the story has been the same. It's a safe blue chip stock that rewards shareholders through dividends. Since 2009 Exxon Mobil has increased its quarterly dividend from 40 cents to over 60 cents. While the long-term future of oil is still unclear and how it will compete with hot and cold green energy companies, oil is still expected to be the status quo through at least the rest of the decade. It may not be the most profitable investment over several years, but it's a place to park money for small returns unless green energy delivers innovative surprises that shake up the oil paradigm.
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.