In the oil and gas industry, the cost of entry is a major barrier. Even for companies that are already established within the industry, sometimes acquisition is much cheaper than growing organically. One company taking advantage of this strategy is Exxon Mobil (XOM).
Exxon has been growing its operations over the last couple years through acquisitions. For instance, Exxon Mobil bought XTO Energy Inc in June 2010 in an all-stock deal of $40.5 billion. We think the acquisition will enable Exxon Mobil to expand its natural gas and oil production business globally. We also think Exxon Mobil will be able to use its expertise to unlock XTO's value in the next few years. This acquisition has added nearly 2.5 billion barrels of oil equivalent (BOE) at about $11.5 per boe to Exxon Mobil and, in doing so, helps the company to better diversify given its comparatively large exposure to natural gas.
In addition to acquisitions, Exxon Mobil also focuses on organic growth. In 2011, the company had about $36.8 billion of capital expenditure and it plans to invest roughly $185 billion over the next five years, or $37 billion per year, in various projects. Between 2012 and 2014, Exxon Mobil plans to start 21 major global oil and gas projects. The company expects these projects will increase production by more than $400,000 boe per day by 2014 and over $1 million boe per day by 2015.
Does that mean Exxon Mobil is a good investment right now? Let's take a closer look at the company.
Exxon Mobil has strong earnings stability and corporate governance practices, and it is rated A+ by S&P. The company also has strong dividend growth. Its current dividend yield is just 2.16% but the company has been raising its dividend payouts for 29 consecutive years. We believe Exxon Mobil will continue to increase its dividend payments in the future because it has strong earnings growth.
In fact, thanks to its strong earnings, as of December 31, 2011, the company had roughly $12.7 billion worth of cash, versus $9.3 billion long-term debt on its balance sheet. Analysts expect the company to earn $8.55 per share in 2012 and $9.10 per share in 2013, versus $8.42 for the trailing 12 months. Over the longer term, Exxon Mobil's earnings are expected to grow at about 5.7% per year. The stable growth should enable the company to further increase its dividend payouts. Moreover, Exxon Mobil's payout ratio is 22%. The relatively low payout ratio also indicates that the company has the ability to raise its dividends. Therefore, we think Exxon Mobil is a good dividend growth stock for investors who do not need to receive high dividends immediately.
In addition to paying out dividends, Exxon Mobil also uses its earnings to buy back shares, which is also good for its shareholders. Over the past year, Exxon Mobil bought back $20 billion worth of its shares and it plans to repurchase about $5 billion worth of stocks per quarter in 2012. It also expects to buy back the shares it issued for acquiring XTO Energy Inc by the end of March this year.
Exxon Mobil also has a lot of hedge fund interest, which further adds to its credit. There were 46 hedge funds with Exxon Mobil Corp positions at the end of last year. Ric Dillon's Diamond Hill Capital had about $150 million invested in Exxon Mobil at the end of 2011. Cliff Asness' AQR Capital Management also had $200+ million invested in this stock as of December 31, 2011. In total, these 46 hedge funds had over $2.4 billion invested in this stock.
Exxon Mobil has a current P/E ratio of 10.3, lower than the industry average of 17, and its forward P/E ratio of 10.1, which is also below the industry average of 11.8. Exxon Mobil's major competitors include BP Plc (BP), Chevron Corp (CVX), and ConocoPhillips (COP). It seems that these companies are even more undervalued compared with Exxon Mobil. Their forward P/E ratios are 6.7, 8.3, and 9.1 respectively. BP and ConocoPhillips are expected to grow at 3-4% annually, slightly lower than the 5.7% for Exxon Mobil, while Chevron's earnings are expected to grow at about 8% per year.
These three stocks also have higher dividend yields than Exxon Mobil. Their dividend yields are all above 3%. BP has the highest dividend yield of 4%, but its dividend history is not very impressive. On the other hand, both Chevron and ConocoPhillips have been raising their dividend payments for over 10 consecutive years.
We like Exxon Mobil. It has modest growth and a long history of dividend payments. We also like its prospects for future growth and the way it hedges so nicely against the US dollar.
In other words, what's not to love?
Note: This article is written by Guan Wang and edited by Meena Krishnamsetty.
Disclosure: I am long COP.