- XOM is a good combination of excellent value and solid growth dividend stock.
- Exxon’s plan to focus on higher-margin production by increasing the percentage of production from liquids will increase its profitability.
- Exxon is taking a calculated risk since the deal with Rosneft promises strong growth prospects for the company.
- Exxon is generating strong free cash flows and returns value to its shareholders by stock buyback and by dividend payments.
Exxon Mobil Corporation (NYSE:XOM) stock underperformed the market in the last years; since the beginning of 2013, XOM's stock has gained only 17.1%, while the S&P 500 index has risen 33.3%, and the Nasdaq Composite Index has risen 38.6%. Nevertheless, XOM's stock is a good combination of excellent value and solid growth dividend stock, and in this article, I will explain why, in my opinion, Exxon stock is a promising long-term investment.
The Company (Description from Exxon website)
Exxon Mobil is the world's largest publicly traded international oil and gas company. The company holds an industry-leading inventory of global oil and gas resources. Exxon is the world's largest refiner and marketer of petroleum products, and its chemical company ranks among the world's largest. The company's headquarters is in Irving, Texas, and it was founded in 1870.
The table below presents the valuation metrics of XOM, the data were taken from Yahoo Finance and finviz.com.
Exxon's valuation metrics are good; it has a low debt, and the trailing P/E is low at 13.80, and the Enterprise Value/EBITDA ratio is very low at 7.39. According to James P. O'Shaughnessy, the Enterprise Value/EBITDA ratio is the best-performing single value factor. In his impressive book "What Works on Wall Street", Mr. O'Shaughnessy demonstrates that 46 years of back-testing, from 1963 to 2009, has shown that companies with the lowest EV/EBITDA ratio have given the best return. Mr. O'Shaughnessy explains that EV/EBITDA is a better way to assess value - that is, how cheap or expensive it is - than looking at the P/E ratio alone. The EV/EBITDA is neutral to a company's capital structure and capital expenditures. Stocks that have very high debt levels often have low P/E ratios, but this does not necessarily mean that they are cheap in relation to other securities.
Latest Quarter Results
On May 01, Exxon reported its first-quarter 2014 financial results, which beat EPS expectations by $0.22 (11.70%) and beat on revenues.
- Earnings of $9.1 billion decreased $400 million or 4 percent from the first quarter of 2013.
- Earnings per share (assuming dilution) were $2.10, a decrease of 1 percent.
- Capital and exploration expenditures were $8.4 billion, down 28 percent from the first quarter of 2013, reflecting the absence of the $3.1 billion Celtic Exploration Ltd. acquisition.
- Oil-equivalent production decreased 5.6 percent from the first quarter of 2013. Excluding the impact of the expiry of the Abu Dhabi onshore concession, production decreased 2.9 percent.
- Cash flow from operations and asset sales was $16.2 billion, including proceeds associated with asset sales of $1.1 billion.
- Share purchases to reduce shares outstanding were $3 billion.
- Dividends per share of $0.63 increased 11 percent compared with the first quarter of 2013.
In the report, Exxon chairman Rex W. Tillerson commented:
ExxonMobil's first quarter earnings and cash flow reflect the company's continuing focus on delivering profitable growth and creating long-term shareholder value. Strong performance in the Upstream benefitted from improved production mix and increased unit profitability. The Corporation distributed $5.7 billion to shareholders in the first quarter through dividends and share purchases to reduce shares outstanding.
Upstream earnings were $7,783 million in the first quarter of 2014, up $746 million from the first quarter of 2013. Higher natural gas realizations, partially offset by lower liquids realizations, increased earnings by $410 million. Production volume and mix effects increased earnings by $20 million. All other items, including asset management impacts, increased earnings by $320 million.
Downstream earnings were $813 million in the first quarter of 2014, down $732 million from the first quarter of 2013. Weaker margins, mainly in refining, decreased earnings by $740 million. Volume and mix effects increased earnings by $80 million. All other items decreased earnings by a net $70 million. Petroleum product sales of 5,817 kbd were 62 kbd higher than last year's first quarter.
Chemical earnings of $1,047 million in the first quarter of 2014, were $90 million lower than the first quarter of 2013. Weaker margins decreased earnings by $90 million, while volume and mix effects increased earnings by $40 million. All other items decreased earnings by $40 million.
Source: company's reporting data
Exxon has been paying dividends since 1970. The forward annual dividend yield is at 2.72% and the payout ratio only 34%. The annual rate of dividend growth over the past three years was high at 12.2%, over the past five years was high at 9.7%, and over the past ten years was also high at 9.6%. I consider that besides dividend yield, the consistency and the rate of raising dividend payments are the most crucial factors for dividend-seeking investors, and XOM's performance has been very good in this respect.
Source: Charles Schwab
Competitors and Group Comparison
A comparison of key fundamental data between Exxon and its main competitors is shown in the table below.
Source: Yahoo Finance, finviz.com
Exxon has the lowest debt to equity ratio, but it has the highest forward P/E and the highest PEG ratio among the stocks in the group.
Exxon's Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the tables below.
The charts below give some technical analysis information.
The XOM stock price is 0.10% below its 20-day simple moving average, 3.01% above its 50-day simple moving average and 9.24% above its 200-day simple moving average. That indicates a long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.41 and descending, which is a slight bearish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 61.85 which do not indicate oversold or overbought conditions.
Analysts opinion is divided. Among the twenty three analysts covering the stock, four analysts rate it as a strong buy, six rate it as a buy, nine rate it as a hold, and four analysts rate it as an underperform.
TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering XOM stock there are only seven analysts who have the four or five star rating, four of them recommend the stock.
On May 08, Argus analyst Michael Burke reiterated its Buy recommendation on Exxon's stock. He explained why:
We are maintaining our BUY rating on Exxon Mobil Corp. and boosting our target price to $114 from $104. Our higher target reflects our positive view of management's planned reduction in capital spending, which should boost free cash flow going forward. We also like the company's plan to increase profitability in the upstream segment by focusing on higher-margin production and by increasing the percentage of production from liquids from a current 52% to 69% by the end of 2017. We note that Exxon's plan to curtail capital spending in the coming years contrasts with that of rival Chevron, which continues to spend heavily on new projects. As a result, Chevron has struggled to generate free cash flow over the last 12 months.
On April 16, 2012, Rosneft, the leader of Russia's petroleum industry, announced that Rosneft and Exxon Mobil signed agreements to implement a long-term Strategic Cooperation Agreement concluded in August 2011 to jointly explore for and develop oil and natural gas in Russia and to share technology and expertise. The agreements form joint ventures to manage an exploration program in the Kara Sea and Black Sea. They also set the terms for investments to be made by the partners in Russian offshore projects. The initial cost of preliminary exploration is estimated at over US $3.2 billion.
Commenting on the agreements, Rosneft President Eduard Khudaynatov said:
Today Rosneft and ExxonMobil enter offshore projects of unprecedented scale in the Russian Arctic and Black Sea regions, which are home to the world's largest hydrocarbon resources base. In so doing we lay the foundation for long-term growth of the Russian oil and gas industry. I am certain that 15 years of Rosneft and ExxonMobil partnership, as well as the use of the latest environmentally safe technologies and unique experience will allow Rosneft to become one of the global leaders in the oil and gas industry.
According to International Business Times:
On May 24, Exxon signed agreement with Rosneft's CEO, Igor Sechin, at a forum in St. Petersburg, an event that some U.S. oil companies avoided after U.S. State Department officials called for a boycott. The pact solidifies a joint project to drill for oil in the Arctic and Siberia and to liquefy natural gas for export to the Far East, according to a statement from Rosneft.
Some investors are worried that in case the U.S. and its allies will strengthen measures against Russia, it will put at risk Exxon's investment in this country. So far, U.S. sanctions against Russia have targeted individuals like Sechin and not entire industries. In my opinion, this possibility is already discounted in the stock price, and Exxon is taking a calculated risk since the deal with Rosneft promises strong growth prospects for Exxon. Furthermore, by withdrawing its troop from the Ukraine border, it seems that Mr. Putin is not interested in escalating the crisis.
Exxon will benefit from the rise of oil and natural gas prices. Oil and natural gas prices have been rising from the start of the year. WTI crude price has risen 15.1% from its low of January 09, 2014, to $104.35 per barrel on May 23 while Henry Hub natural gas price has risen 6.3% since the beginning of the year to $4.405 per Million Btu.
WTI crude July 2014 leading contract
Henry Hub natural gas July 2014 leading contract
Charts: TradeStation Group, Inc.
As the world's largest publicly traded international oil and gas company, Exxon Mobil will benefit from the rising prices of oil and natural gas. Furthermore, the company's plan to focus on higher-margin production by increasing the percentage of production from liquids from a current 52% to 69% by the end of 2017, will increase its profitability. Exxon has compelling valuation metrics and solid earnings growth prospects; its Enterprise Value/EBITDA ratio is very low at 7.39. Exxon is generating strong free cash flows and returns value to its shareholders by stock buyback and by increasing dividend payments. The company distributed $5.7 billion to shareholders in the first quarter through dividends and share purchases to reduce shares outstanding. All these factors bring me to the conclusion that XOM stock is a smart long-term investment. Furthermore, the rich growing dividend represents a gratifying income.