Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)

Summary

  • Exxon has a superior track record.
  • Yet production growth ambitions trail that of competitors.
  • Yet shares trade at a premium valuation as free cash flows to investors are falling.

Investors in Exxon Mobil (NYSE:XOM) continue to be pleased with the company despite a modest fall in first quarter earnings. Shares trade around all-time highs, having returned 140% in capital gains over the past decade, a return which even excludes the fat dividend received in the meantime.

While Exxon remains a perfect long-term investment, I am a little bit reserved, as the company trades at a premium valuation compared to some of its competitors. At the same time production growth is limited and cash flow to investors remain under some pressure.

March Meeting

Back in March Exxon already gave a big analysts and investor presentation, outlining its growth plans for the coming four years.

The company stressed the strong resource position, expected production growth and growing cash flows to investors which should driven incremental value creation.

The company illustrated that it had just witnessed peak capital expenditures as it expects that past investments will drive future production growth, earnings and can result in improved cash flows being available for shareholders.

2013 In Recap

Last year, Exxon reported earnings of $32.6 billion. The company reported peak capital expenditures of $42.5 billion that year. In combination with $25.9 billion in cash being returned to shareholders through dividends and repurchases, the company was building up leverage at a moderate pace.

As a result, Exxon decided to cut back on its capital expenditures in the short-to-medium term, while cutting back the pace of share repurchases in order to preserve cash.

Production Growth

Exxon reported a 103% replacement ratio for the oil being produced over the past year, marking two decades in a row in which the replacement ratio exceeded a 100%. As a result total reserves now exceed 25 billion of barrels of oil equivalent, the equivalent of roughly 16-17 years of production at current rates.

Exxon now expects to grow new production by nearly a million barrels of oil-equivalent between 2013 and 2017. Growth will come from the Kashagan Phase 1 project in West-Africa and the Sakhalin 1 project, among others. This will be largely offset by declining production in maturing fields, yet total production is expected to increase modestly from 4.0 million barrels in 2013 to 4.3 million barrels in 2017.

Production will stagnate in 2014, but annual growth of 2-3% is seen per year between 2015 and 2017. Growth is tailored towards liquids production which is expected to grow by 4% per annum while gas production should increase by just a percent over that time period.

Q1 Results

On Thursday, Exxon released its first quarter results. Reported earnings fell by 4% to $9.10 billion while the fall in earnings per share was limited to 1% as a result of share repurchases with reported earnings coming in at $2.10 per share.

Reported production fell by 5.6%, or by 2.9% when excluding the expiry of the Abu Dhabi onshore concessions. As a result, oil-equivalent production fell towards 4.15 million barrels of oil-equivalent with refinery throughput coming in at 4.51 million barrels.

Upstream earnings were solid, increasing by roughly 11% to $7.78 billion as notably higher natural gas and bitumen prices offset weaker production.

Cash Flow Picture Should Improve

Exxon Mobil has made large investments in recent times with capital expenditures peaking at $42.5 billion in 2013. This is expected to fall towards $40 billion in 2014, falling to an average of $37 billion between 2015 and 2017.

As a matter of fact first quarter capital expenditures fell by 28% to $8.4 billion after the company made a $3.1 billion acquisition of Celtic Exploration last year.

These prudent capital expenditures moves allowed Exxon to hike its quarterly dividend by 10% to $0.69 per share, providing investors with a 2.7% dividend yield. The pace of stock repurchases has been cut back to $3 billion per quarter. Share repurchases peaked at roughly $21 billion per annum in 2011 and 2012.

At the current pace investors still receive $22 billion per annum through share repurchases and cash dividends as leverage has slowly increased in recent times. Holding $4.6 billion in cash at the end of 2013, the net debt position of the firm has inched up towards $18 billion over the past few years.

Takeaway For Investors

Exxon has been trading at a premium valuation for a long time now compared to many of its major oil peers. Strong production growth, high payouts to investors and solid long-term return on its stock with shares trading at all time highs, all encourage investors.

That being said, Exxon now commands a market valuation of roughly $435 billion, the equivalent of 13 times earnings at $33 billion. The rather limited leverage and historically high payouts to investors still cause appeal to investors. That being said, Exxon is expected to cut its combined dividend and share repurchase returns to roughly $22 billion per annum, for a yield of 5% per annum.

The reasonably high earnings multiple with recent momentum might be surprising as production fell nearly 6% in the first quarter, still expected to come in flat this year. In this light an investment in oil names like Chevron (NYSE:CVX) or ConocoPhillips (NYSE:COP) which are showing better prospects for production growth, and trade at more appealing multiples around 10 times earnings, might be more appealing.

Despite the cut back in capital expenditures and lower pace of share repurchases, leverage might still be on the increase if asset sales are scaled back. Capital expenditures still exceed depreciation and amortization charges by a 100%, or more than $20 billion. At the same time payouts to investors of $22 billion per annum run at a rate of about $10 billion less than earnings, implying that leverage is still slowly increasing.

While Exxon still represents a perfect long-term investment, I believe there are better alternatives out there as discussed above.

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.