Buy-recommended Exxon Mobil's (XOM) big bet on natural gas gets unexpected support from the unfortunate nuclear disaster in Japan. Adding financial appeal to last year’s acquisition of natural gas producer XTO Energy, Chief Executive Rex Tillerson declared at the analyst meeting on March 9 that XOM will have already repurchased 40% of the stock issued for XTO by the end of the first quarter 2011. That makes sense to us because we see XOM stock offering unlevered appreciation potential of 29% to a McDep Ratio of 1.0 where price would equal Net Present Value (NPV) of $112 a share. Raised from $107 on evolutionary gains in natural gas and oil, NPV is concentrated 27% on natural gas and 53% on oil (see table Functional Cash Flow and Present Value). A longer life index for proven reserves by latest disclosures ratifies higher growth potential for natural gas.
All businesses are contributing growing cash flow. Even before the urgent Japanese need to replace lost power caused immediate new demand for liquefied natural gas, which XOM supplies mostly from its resources in Qatar, Mr. Tillerson enthused about the “ever expanding universe of customers in Asian LNG”. Back in North America, the price of long-term natural gas has crossed above its 40-week average. A far-sighted power generator can theoretically contract for ongoing natural gas supply at an exceptionally attractive price. XOM is well-positioned around the world to profit from supplying energy to fuel global growth and for furnishing gains to investors.
Originally published on March 29, 2011