There was a bounce back in the market today as stocks rose in the face of some decent economic news. The number of jobless claims dropped which is causing some investors to feel a little more confident about the economy. It still remains to be seen if all of the mass selling and hysteria have ended or will continue for a little longer. If the market does weaken investors should take a look at one oil name that is getting cheaper. Oil has finally dropped back to levels that are making energy stocks start to look attractive again. Let’s take a look at one energy stock that is reasonably valued.
Exxon Mobil (XOM)
Exxon is right on the verge of becoming a decent dividend play. The company’s shares currently have a 2.6% yield. That is not terrible but not at the 3% minimum that I like to see either. Exxon is the first or second largest company in the world depending on the hour of the day that you look at the market cap. The oil giant jockeys for the number one spot with Apple (AAPL).
Exxon is an earnings giant with $383 billion in revenue last year and on pace for $466 billion in revenue for this year. The past two years have been an upswing for Exxon as revenues had dipped 35% from 2008 to 2009. Exxon’s earnings are approaching the levels that the company was at back when oil was pushing $150 a barrel.
The company’s earnings are tied heavily to the price of crude oil. Higher oil prices mean better top line growth and revenue for earnings. While oil prices over $100 are ideal for Exxon, the company can still be very profitable with oil prices in the high 80s. Exxon has been trying to shift the company’s focus from pure oil exploration, production and refining by investing heavily in natural gas.
Exxon is the largest natural gas company in the United States after completing its acquisition of XTO Energy last year. The company spent $29 billion to grow its natural gas operations. With natural gas prices at just $4 per million British thermal unit, the company has not yet been able to benefit from this purchase. Exxon however believes that natural gas is the energy of the future. The company is tying much of its future growth to natural gas. A substantial rise in natural gas prices would be a big driver of earnings in the future.
At $70 a share, Exxon’s stock currently trades at 8.5 times earnings and 2 times book value. Exxon trades at 7 times its free cash flow. Free cash flow for last year stood at $21.5 billion and is on pace to break that amount for this year, coming in at $14.8 billion through the first two quarters of this year. The current P/E ratio is in line with the industry average.
Short term catalysts for the stock would be a rise in oil prices caused by greater demand or an oil shortage. Long term catalysts will be a rebound in the natural gas market. Exxon's shares are worth nibbling on now. I think that the stock is a solid buy candidate in the 60s.