Gas prices have gotten to the point where I dread looking at the pump when I need to refill my gas tank. A week ago I purchased gas for a personal record high of $4.55 per gallon. Today when I filled my gas tank I got a reprieve, only paying $4.35 per gallon. Now that I am paying record high gas prices, I cannot help but wonder about the amount of profits that major energy companies like Exxon Mobil (XOM) are making.
I checked on Exxon and found that it is the largest integrated oil and gas company in the world. The current company was formed when Exxon Corp. and Mobil Corp. merged on Dec. 1, 1998. Exxon is currently trading around $84 with a market cap of $394 billion. The price-to-earnings ratio is 9.9, and the price-to-book ratio is 2.5. The stock has traded in a 52-week range between $67.03 and $88.13. In 2011, Exxon increased its revenues by 27% to $486.4 billion, compared to revenues of $382 billion in 2010. Exxon's 2011 net income increased by 36% to $41 billion, compared to net income of $30 billion in 2010.
The primary reason Exxon was able to increase its 2011 earnings was because of the spike in the price of oil. Oil prices were in the $70 to $80 per barrel range until late 2010. Oil prices rose dramatically from the fall of 2010 until April 29, 2011, when the price peaked at $113.93 per barrel. Oil prices are currently hovering around $100 per barrel. At $100 per barrel, oil producers like Exxon can flourish. In the fourth quarter of 2011, Exxon reported revenues of $121.6 billion -- a 26.6% increase from the fourth quarter of 2010. Net income for the fourth quarter of 2011was $9.4 billion, which was a 1.6% increase from the fourth quarter of 2010. In the fourth quarter, Exxon's earnings per share grew by 6%.
As an investor, one of the most relevant comparisons between Exxon and its competitors is the stock performance. Exxon's three-year stock performance is much weaker than all of its competitors, with the exception of BP. If not for the Macondo oil spill disaster, BP's stock would also have outperformed Exxon. Despite the fact that Exxon had relatively strong earnings in 2011, three of its competitors were able to grow earnings at a faster pace (Chevron at 41.4%, BP at 790.6%, and Royal Dutch Shell at 53.6%) than Exxon over the last 12 months.
Even though Exxon's year-over-year earnings increased in 2011, its revenues are roughly equal to 2008 and its net income is down by 10% from 2008. In an effort to increase production, Exxon has budgeted $185 billion toward development and exploration projects over the next five years. Exxon has already made large investments in the area of natural gas; however, natural gas is selling at long-time lows. It is likely that Exxon's large development projects will be successful, but it will be several years before the bottom line will benefit from these projects.
I believe that there are four reasons for Exxon's relatively poor stock performance:
- The company's flat long-term earnings. Exxon is the only one of the five leading oil companies to have lower earnings in 2011 than it did in 2008.
- The company does not have any visible catalyst to grow earnings.
- The company's large size prohibits fast growth.
- The company's dividend yield is lower than its competitors.
Exxon has tried to boost its stock price through stock buybacks. Over the last three years, the company has bought back $52 billion worth of its own stock. The company may have repurchased its stock at a good price, but if the goal was to increase earnings per share then the buyback was a failure. Last year's profit of $8.42 per share is lower than in 2008 when the company's had earnings per share of $8.66.
I would avoid buying stock in Exxon for the following reasons:
- Exxon's valuations (P/E ratio 9.82, price-to-book ratio 2.52) are considerably higher than each of its competitors.
- Exxon has been unable to consistently grow earnings. As noted above, its earnings were lower in 2011 than its 2008 earnings. Also, the company's near-term earnings are unlikely to improve, as the company predicts its production could fall by 3% this year when compared with 2011 numbers. The company is spending a lot of money on developing assets, but has been unable to reap any sizable benefits.
- Exxon's dividend yield of 2.2% is considerably lower than its competitors.
- As a result of Exxon's stagnant earnings and dismal future earnings outlook, its stock has underperformed each of its competitors (with the exception of BP).
I would not recommend investing in Exxon Mobil. I believe that ConocoPhillips, Royal Dutch Shell, and Chevron are all better investment choices.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.