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Summary

  • With the stock trading around $101, fair value should reach $110 by the second half of the year on the basis of improved North America production.
  • Investors have to trust that management will continue using its capital for the good.
  • Factoring Exxon's strong cash flow, which management will use for things as dividends and buybacks, $112 to $115 is possible in the next 12 to 18 months.

With better-than-expected results coming out from British oil giant BP on Thursday, the attention will turn to Exxon Mobil (NYSE:XOM), which has had recent issues with North American production growth. But that has never stood in management's way when it comes to figuring out how to turn oil/gas into cash.

Exxon investors, which had seen the company's dividend continue to grow, have been the beneficiaries. And when you consider Exxon's strong track record of returns on capital, there has been very little about which to complain. But that doesn't mean it's time to get complacent. While management has done an incredible job of navigating rising costs while focusing on various energy projects, rivals like Chevron (NYSE:CVX) and Royal Dutch Shell (RDS-B) have ramped up their own production projects to secure various overseas markets.

Exxon management understands the importance of its production and explorations projects, particularly in North America. But on Thursday, when Exxon is due to report first-quarter results, management will need to convince analysts that the company's long-term status as an energy power can be preserved. To do this, management must present Exxon's plan to get production going in the right direction, while also addressing the recent struggles in both the refining unit and in the downstream business.

Despite a recent dip in earnings-per-share estimates, analysts seem more positive ahead of Thursday's results than they did in the January quarter. The Street will be looking for earnings of $1.88 per share. Expectations have dropped 5 cents over the past 30 days. This represents a year-over-year earnings decline of 11%. For the full fiscal year, analysts will be looking for earnings of $7.53 per share, up 2% year-over-year from last year's total of $7.37.

In terms of revenue, the Street will be looking for Exxon to post $109.76 billion, which would represent 1% growth year-over-year. Last year, the company reported revenue of $108.81 billion. For the full year, revenue is projected to come in at $429.93 billion, which will be down 2% year-over-year from last year's mark of $438.26. But unlike most sectors, revenue growth is not what drives the oil industry. The main drive is production growth.

Also consider, even amid Exxon's weak revenue performance, which has fallen by an average of 7% year-over-year in the past four quarters, Exxon has remained profitable for eight consecutive quarters. This is a testament to a strong management team. Not to mention, business conditions have not been exactly favorable during that span. The entire industry has been squeezed by (among other things) weak oil prices.

What's more, when factoring the effects of external factors like requirements from OPEC (Organization of the Petroleum Exporting Countries), management has done a solid job of posting organic production growth, which has reached 3%. Both Chevron and Royal Dutch Shell (RDS.A, RDS.B), which have hovered around 2.5%, would be pleased with that result. Not to mention, Exxon's better-than-expected showing liquid production growth, which has surpassed 5%. Note, this has been one of the most popular-cited bear arguments.

And when you consider the quicker pace of the company's turnaround in its chemical business, which has grown earnings by more than 30%, it demonstrates how management has not lost its pulse on what drives this company forward. This also shows how management deserves more time to get production growth going again.

This also means investors have to trust that management will continue using its capital for the good. From my vantage point, any increase in expenses will be justified, even if it impacts near-term profitability. I realize that's easier said than done, but as noted, this company has a strong history of producing returns on invested capital.

And with the stock now trading around $101, I project fair value to reach $110 by the second half of the year on the basis of improved North America production. To that end, when you factor Exxon's strong cash flow, which management will use for things as dividends and buybacks, $112 to $115 in the next 12 to 18 months is not out of the question.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's energy sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.

Source: Why Exxon Mobil Is Heading To $110