The company estimates approximately 80% of the demand growth will occur in non-OECD nations. In order to meet this demand, the company believes efficiency improvements are necessary, both on the supply and demand side. Technology will play a key role [read: Schlumberger].
XOM expects oil prices to continue exhibiting cyclicality. This is based on management’s belief that demand will accelerate and decelerate, consistent with past patterns, which will lead to ups and downs in oil prices.
Hence, XOM's strategy is to invest through the cycles. By utilizing a disciplined investment approach, and managing costs, the company looks to continue to generate attractive returns even when commodity prices are well below current levels. Increasingly, this is becoming a distinguishing and attractive investment feature for Exxon Mobil.
In addition, management believes high costs, which have supported recent prices, will moderate in the next 2-3 years as new rigs are completed. So far Wall Street's estimates remain unchanged at $6.20 EPS.
XOM is one of the largest oil and natural gas producers in the world, maintains the largest portfolio of proved reserves and production in North America, and is the largest net producer of oil and gas in Europe. Through wholly owned ExxonMobil Canada Ltd. and its 69.6%-owned affiliate Imperial Oil (NYSEMKT:IMO), ExxonMobil is the largest crude oil producer in Canada.
XOM continues to look for ways to utilize its cash and reduce its $32.7 billion cash balance. Capital spending is likely to remain around $20 billion per year. Rex Tillerson, Chairman and CEO of Exxon, commented that dividend increases, which have been a yearly event at Exxon Mobil for the last twenty three years, would likely continue.
However, he believes that Exxon Mobil’s shares are attractively valued, and that buybacks are a tax efficient way to return cash to shareholders. The company has accelerated its share buybacks in the past several years, and we believe that the pace could rise again in 2007. Share buybacks to reduce outstanding shares totaled $16 billion in 2005, and the company is on track to reach $25 billion in 2006.
In addition, the company said that it would make an acquisition if it saw the right opportunity. However, we would not expect Exxon Mobil to make an acquisition with oil prices at current high levels. The quality rating has a direct relationship to the dispersion of performance results. XOM's high quality rating should lead to a low degree of price volatility.
Recent analyst earnings forecasts for XOM have increased which indicates a rise in expected earnings growth. Relative to changes in earnings forecasts for other companies XOM compares favorably. In addition, the company has reported earnings that were higher than those predicted in earlier estimates which may be a positive for future earnings growth.
According to the May 2006 Oil Market Report from the International Energy Agency, demand for crude oil should grow by about 1.5% in 2006 over 2005. However, following nearly 20 years of underinvestment, the supply of crude oil is barely keeping pace. This is the major cause of high commodity prices.
Longer term demand should grow at about 1.7% per year, meaning it is expected to grow more than 40% over the next 20 years. Natural gas demand is expected to remain flat in 2006, and then to resume its growth trajectory, according to the American Petroleum Institute. Coal consumption is projected to grow at about 2.5% per year over the next 20 years, based on US Department of Energy forecasts.
According to S&P:
"A blend of our discounted cash flow [assuming a WACC of 9.1% and terminal growth of 3%] and peer multiples leads to our 12-month target price of $87, at an enterprise value of 7.3X our 2007 EBITDA estimate, a premium to peers, warranted, in our view, by XOM's high earnings quality and substantial refining conversion capacity."
XOM 1-yr chart