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In the "Late Summer Sell Off" oil was hit especially hard, dropping to $80 and pulling down oil producers with it. This might be an ideal time to profit from the panic and get greedy while others are fearful. This volatile market has created some nice bargains for value seekers.

XOM is one of the companies hit hard with its obvious exposure to oil prices. While I never suggest buying or selling a company for the sole purpose of profiting from the price of a commodity, I see no malice in profiting from others' will to do so. Many of these oil companies have very good businesses and should not be trading for such low prices.

Exxon Mobil: Exxon is the largest company traded on the NYSE with a market cap around $350B. It is a vertically integrated oil giant who explores for, produces, refines, and markets oil and gas. Its 3 segments include upstream, downstream, and chemical (75/11/15). It has operations all over the world and with its recent purchase of XTO, greatly increased its investment in natural gas. Warren Buffett has a .01% stake in XOM.

Exxon has excellent management. They consistently repurchase shares and have raised their dividend almost 30 years in a row. Their dividend yields 2.6% with a payout ratio of 25%. Along with shareholder alignment, their management also performs well within the business.They have some of the highest and most consistent production in the industry as well as industry leading safety. Their average ROCE over the last 10 years is more than double that of the competition (annual report). Their management returned $14 for every BOE (Barrel of Oil Equivalents) in 2010.

Production Statistics:

  • 100% + Replacement 17 years in a row
  • 209% replacement in 2010
  • 84 billion BOE resource base at the end of 2010. Industry Leader.

XOM has about $155B in equity. This comes with a $350B market cap resulting in a price/book around 2.3 and a P/E of 10. This seems a little high for a text book Graham investment, but when factoring in 25% ROE and growing returns, it can easily be justified as undervalued. XOM earned $30.5 billion in 2010 and they are on pace to earn far more than that this year. Using any type of DCF analysis it is easy to see why XOM is undervalued.

If you were to forecast current earnings over 5 years we would be looking at $200B in accumulated earnings, which I consider a very conservative estimation. Add this to equity, and you're already looking at a small premium to the current market cap. Their undervalued status clearly depends on the expectations of sustainable earnings. Its P/B is just not low enough to depend heavily on equity like many Graham type investments. However, their management and consistent production allow ensured faith in sustainability.

Balance Sheet:
Exxon has a solid financial position. It has a debt/equity ratio of .11 and a current ratio of .97. This comes with 10B in cash which is 2.07 cash per share. XOM has above average metrics for receivable, inventory, and asset turnover which make it particularly liquid compared to its competition. Not to mention, it is one of the few companies with a AAA rating.

Like all oil producers, Exxon will suffer from a decrease in the price of crude. This was evident last week. The current global economy is teetering on fears of debt in Europe and a possible economic slowdown in the United States. If traders find a decrease in global demand for oil then XOM's price could suffer as a result. Exxon's size and production make it more suited than most to handle economic headwinds. In the recent recession, when XLE dropped some 56% from its high in 08', XOM only fell 35%.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in XOM over the next 72 hours.