Exxon Mobil's New Natural Gas Plans Can Boost Your Portfolio

| About: Exxon Mobil (XOM)

Things are looking bright for Exxon Mobil (XOM), the largest natural gas producer in the US and the largest publicly traded international oil and gas company in the world. The Senate recently rejected an attempt to end oil subsidies, and the company is expanding besides. It acquired new land - a large acreage in Oklahoma from Chesapeake Energy (CHK) for $590 million - and has several lucrative deals in place.

Exxon has a deal in place with Iraq's autonomous Kurdish region as well as a deal with Canacol Energy for shale oil exploration in Columbia. The company recently reached an agreement with YPF SA (YPF) to jointly develop deposits in Argentina and, with ConocoPhillips (COP) and BP (BP), has reached a settlement with the Alaskan government over the Pt. Thomson development. Under the terms of the settlement, Exxon and its partners will be allowed to develop the resource provided that production begins no later than mid-2016. Exxon, ConocoPhillips, BP and TransCanada (TRP) will also be working together to commercialize North Slope natural gas resources. Exxon is also bidding for the rights to explore for oil off the coast of Uruguay.

Exxon hasn't done that well so far this year, returning just 1.40% in the first quarter, but natural gas prices are also down. Exxon has a comparatively large exposure to natural gas and it is continuing to ramp up its investment in the commodity. The company recently announced plans to increase production, and that it would invest $37 billion in natural gas production annually for the next several years. The company's previous capital expenditure ranged from $33 billion to $37 billion. While the allocation of its actual spending will vary depending on the projects in motion and their progress, it is a heavy chunk of change and a complete departure from the strategies its rivals have in place.

Exxon is maintaining its focus on natural gas, in spite of historically low prices. In contrast, competitors Chesapeake Energy and ConocoPhillips are cutting back on natural gas production, turning instead toward crude oil, which was priced at over $109 a barrel in February. The thing is that switching gears like that is high cost and high risk. Exxon holding its natural gas ground means that the company will be in a better position to reap the benefit when prices turn around.

After all, natural gas is a commodity. Even though the price for natural gas is low right now, it will go back up. Already, the tides seem to be changing. Oil is now under $102 a barrel and natural gas is on the rise. While many analysts doubt that oil will fall below $100 a gallon given the high demand for crude seen in emerging economies like China, it seems as though Chesapeake Energy, ConocoPhillips and all the other companies in the oil and gas sector that switched gears when the price went up on crude could have jumped the gun.

Exxon recently traded at $84 a share and has a mean one-year target estimate of $94 a share. In addition to the 12% predicted upside, the company also pays a $1.88 dividend (2.20% yield), meaning that investors buying in now should be able to realize returns over 14% on their investments in Exxon. Right now, Exxon's revenue growth trails its industry's average (15% vs 25.4%) versus the same quarter last year but the increase was still enough to produce a 6% lift in earnings per share quarter over quarter and boosting its earnings per share for the year from $6.22 at the end of 2010 to $8.42 at the end of 2011.

To Exxon's credit, it also has a super low debt to equity ratio of 0.11 and an increasing return on equity. The company's return on equity went from 17.44% at the end of Q4 2009, to 20.74% at the end of Q4 2010, and ultimately 26.59% at the end of Q4 2011. This is less than its industry's average of 51.75% but it significantly exceeds that of the S&P 500, which currently shows a return on equity of 14.77%.

Exxon is also priced at a discount to its peers. At its current share price, Exxon has a forward price to earnings ratio of 9.31, versus 11.41 for its industry. The company also has a lower price to sales ratio than its peers (0.91 vs. 1.71), as well as a lower price to book ratio (2.60 vs 5.97) and price to cash flow ratio (7.26 vs 9.36).

In contrast, rival ConocoPhillips recently traded at $74 a share with a mean one-year target estimate of $81.51, representing an estimated 10% upside. The company also offers a $2.64 dividend (3.50% yield), so investors buying in now are estimated to earn returns over 13% on their investments in ConocoPhillips over the next year. At a rate of 17%, the company's earnings growth topped that of Exxon, as its earnings per share increased. ConocoPhillips went from an earnings per share of $1.39 at the end of the fourth quarter 2010 to $2.56 at the end of the fourth quarter 2011 - an increase of over 84%. This translated to an earnings per share of $7.61 in 2010 to $8.97 in 2011.

ConocoPhillips also has a low debt to equity ratio. While not quite as low as that of Exxon, it is significantly lower than that of its peers. Moreover, ConocoPhillips is priced better than Exxon. At its current trade, the company is priced at just 8.67 times its earnings. ConocoPhillips also boasts a lower price to book ratio (1.49), price to sales ratio (0.42) and price to cash flow (4.93).

The problem is that, with the recent change in oil prices and natural gas prices, there is no telling whether ConocoPhillips' comparatively better position will hold - especially with its increased focus on oil as of late. The same is true with Chesapeake Energy. The company looks good at first glance. It has enjoyed revenue growth of 38.1%, earnings per share growth of 125% and low pricing. Chesapeake Energy has a forward price to earnings ratio of just 7.51. It is also priced low relative to its book value (0.88), sales (1.26) and cash flow (2.47), but its favorable position may not hold. Given its low dividend yield of 1.58%, the company's primary draw is its upside and that may not be there after the recent decrease in oil prices.

I recommend investors take a chance on Exxon. Natural gas is on the rebound, and this company is a good position to take advantage of that fact.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.