Exxon Mobil (XOM) is one of the largest corporations in the world by market capitalization and tops the Global Fortune 500 list. As outlined in its 2011 annual report, Exxon Mobil takes a long term perspective (over the next three decades) in estimating increasing demand for energy output and undertaking appropriate steps to meet it. Specifically, it projects a 30% increase in global energy demand by 2040. This is important in two respects.
First, a long-term commercial perspective translates into an equally long-term strategy and its implementation which ultimately translates into sustained growth in stock returns including capital appreciation and dividends. This is evident in Exxon's past as well. For instance, Exxon's dividend payments to shareholders have grown at an average annual rate of 5.7% over the last 29 years. Further, Exxon's latest dividend announcement this quarter is the world's largest dividend payout at $10.7 billion. Analysts, too, recommend Exxon Mobil as a long term energy investment. In addition to dividends and more importantly for Exxon, it seeks to return to value to investors via share buy-backs. The company intends to repurchase $5 billion in stock per quarter through 2016.
Second, it implies fiscal prudence. It, necessarily, forces a firm to take into account uncertainties and adopt a culture of risk management that mitigates potential losses in order to achieve sustained profitability. In terms of stock betas, a measure of the risk of an industry or company relative to the overall risk of the market, the petroleum (integrated) and petroleum (producing) industries have average betas of 1.18 and 1.34, respectively. Betas of Exxon Mobil and its 4 major competitors are shown below:
Exxon Mobil: 0.69
British Petroleum (BP): 1.97
Chevron (CVX): 0.97
ConocoPhillips (COP): 1.09
Total SA (TOT): 1.49
As is evident, Exxon has the least risk when compared to its industry and its nearest competitors. In terms of long-term debt also, Exxon compares favorably with its nearest competitors as shown below:
Exxon Mobil: $9.23 billion
Total S.A: $31.42 billion
British Petroleum: $46.47 billion
ConocoPhillips: $28.36 billion
Chevron: $9.28 billion
As hinted at earlier, amongst its competitors, Exxon continues to remain the largest company by market capitalization, nearly double its closest competitor, Chevron. The latest market capitalization numbers are shown below:
Exxon Mobil: $398.6 billion
Chevron: $205.05 billion
British Petroleum: $129.54 billion
Total S.A: $109.94 billion
ConocoPhillips: $68.04 billion
As is expected from figures mentioned above, Exxon continues to invest in long-terms projects while using almost no debt to fund them. Exxon demonstrates exceptional finances with a 9.6% debt to equity ratio. Argus rates its financial strength as high and S&P gives it an AAA debt rating, which, incidentally, it does not the big labor dominated US government.
While tightly integrated, Exxon Mobil divides its energy and petrochemical products into three businesses segments comprising of 10 separate companies: the Upstream, Downstream, and Chemical business segments. The upstream businesses are involved in the exploration, development, and production of crude oil, natural gas, and petroleum products. The downstream businesses are involved in the refinement and distribution of products derived from crude oil and other feedstock. These products include fuels and lubricants. Finally, the chemical businesses sell petrochemical products including aromatics, olefins, butyl polymers, and hydrocarbon fluids.
Within its upstream segment, Exxon has a resource base of 87 billion net oil-equivalent barrels, which is a 3% increase this year. Out of these, 29% are proven reserves equating to 15 years of reserve life at current production levels. This is the largest resource base of any non-governmental company. Exxon is also the world's largest non-governmental natural gas reserve holder. Its natural gas reserves were significantly boosted after acquiring Fort-worth based XTO energy 2010 with gas reserves of 45 trillion cubic feet of gas. XTO, since then, as an Exxon subsidiary, has increased its resource base by 70% to about 76 trillion cubic feet of gas. Last year, Exxon Mobil made the largest discovery of oil within the last 12 years in the Gulf of Mexico. It claimed that it had found the equivalent of 700 million barrels of oil in the Hadrian oil fields. Further, the estimated size of the Hadrian field may increase as drilling continues in the third and the deepest field. Consequently, Exxon stock has risen as much as 2.3% since March 21 till June last year. With 11 upstream projects scheduled to start from 2011 to 2013, Exxon plans to spend $33 to $37 billion each year through 2015 in order to meet the anticipated demand for energy.
Exxon continues to deliver the highest return on capital employed in its industry with its earnings per share (EPS) having risen steadily at 12.3% per year since 2001. In light of its recent XTO acquisition, Exxon is significantly bullish on natural shale gas and anticipates significant increase in demand for this energy source.
After the Valdez spill 21 years ago, Exxon's safety system and procedures are now a standard setting for the industry. Exxon Mobil's Polyolefins plant in Baton Rouge has set a new record in industrial safety by earning the Distinguished Safety Award from the National Petrochemical & Refiners Association for four straight years in a row up to 2006. In a recent comparison of BP's and Exxon's safety record, an article notes that BP, till 2010, has received 760 OSHA fines while Exxon had received only 1. Exxon also has a better worker safety record than its peers available for 2008. During this year, it had 2 recordable injuries for million hours worked when compared to 3 injuries for its peers. Exxon has also been known to abandon drilling in light of facts that might threaten worker safety or have the potential of causing a major accident. This is what it did when drilling the exploration well, Blackbeard, in the Gulf of Mexico. It had already spent $187 million before it decided to abandon the project.
Perhaps the only chink in Exxon Mobil's impenetrable armor seems to be a crack of internal origin. After having taken a principled stand on the science of global warming and climate change by funding groups dedicated to researching and propagating the truth about politicization of climate science, Exxon, has, in a display of moral uncertainty and a spirit of appeasement, decided to soften its stance on the issue of climate change by debating, not the validity of global warming propaganda, but of how best to frame rules tackling the problem. While there is enough evidence that Exxon continues to fund climate skeptic groups in secrecy, such funding is slowly being denied. It then remains to be seen whether Exxon Mobil's lack of moral certainty and courage, eventually, prove to be its Achilles' heel.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.