By Josh Newton
Exxon Mobil (XOM) is the second-largest company in the world based on revenue. This company began in 1999 with the merger of Exxon and Mobil. Today it produces 3.9 million barrels of oil equivalent, making it the biggest of the six major oil companies today. Its competitors are BP, Chevron (CVX), Royal Dutch Shell (RDS.A), Total (TOT) and ConocoPhillips (COP). Exxon Mobil accounts for about 3% of the global production of oil.
During 2011, the cost of crude oil went up 19%, and Brent crude also went up 38% during this time. I expect a second bullish year for crude prices in 2012, and Exxon will also be a key beneficiary because of natural gas price increases and its new biofuel program. Strong cash flow from these projects (particularly natural gas) should continue to propel the current dividend yield of 2.7% higher.
The firm is the world's largest producer of natural gas already. It expects natural gas to become more in demand for electric production. It anticipates it to increase from 20 to 30% of the electrical production around the globe.
The June futures closed at $2.34, which was about 23% down from a decade ago. Wholesale prices for natural gas were $1.84 for 1,000 cubic feet in April.
Since prices are so low, many are anticipating a big increase shortly. Some say it could rise as high as 200%-300% of what it is now. However, that is far from a sure thing.
The fact that the company is so reliant on natural gas could signal long-term danger. Just look at the price fluctuations for the last 10 years to see what I mean.
The truth is that there is a huge oversupply of natural gas today, which is why the price is so low. The danger to these companies is that the demand in the next 10 years does not increase around the world as quickly as they anticipate. In this case, they have no leverage, and must drop their prices accordingly.
To go along with that, Exxon Mobil is also embarking heavily on a biofuel research program. This research and development project is on the potential of using algae as biofuel. Assuming research and development milestones are achieved, the firm anticipates it will pay out over $600 million on algae bio-fuels program in the next 10 years.
After some initial research, indications are that particular kinds of algae are able to produce enough bio-oils to supplement regular gas for diesel and aviation fuels. While the growth process will be slow, in the next three decades Exxon Mobil anticipates that the population and economic growth will increase the demand for biofuels.
However, natural gas is still the key to Exxon's future. Exxon says that oil and natural gas production will keep increasing to meet energy requirements. This is simply because of the huge quantity available. This evidenced by the 606 natural gas rigs in America today.
Even though this is a significant drop from the 936 in 2002, it still shows that natural gas is more easily available than biofuel. The current natural gas levels are up about 50% from the benchmark 5 year average levels. This huge surplus is what has created the 10-year low prices.
The company shares are currently trading around $84. It has a price-to-earnings ratio of 10.1, and the market capitalization is $395 billion. The company raised the quarterly dividend by 21% in the first quarter of 2012. The raise is the biggest single-quarter raise since the modern dividend format started in 1975. The price-earnings ratio is 10.07, and the profit margin is 9%.
It does have $4.22 billion in cash and $32.5 billion in long term debt. The price to sales ratio stands at .29. This is actually the lowest number out of any of the competitors except for ConocoPhilips, which also has a .29 ratio.
Based on these metrics and the company's projects, I think the company is a good short-term purchase. The price will likely rise to around $95 in the next 12 months, largely due to the expected rise in natural gas prices. Therefore, you can anticipate a 10%-12% return on investment this year.
However, long-term the company is a risky investment for a value investor. While natural gas could increase in price substantially over the next 10 years due to substation for other fuels and LNG export possibilities, this is no sure thing. In the alternative, the company's foray into biofuels could eventually pay off, but that is a long way off.
The best-case scenario for Exxon Mobil is that the biofuel program becomes as successful as it believes, and that the natural gas costs continue rising. Even if everything works out, the stock price is simply too high right now to provide a substantial long-term gain for value investors. There is nothing wrong with buying it just for 2012, but I would hesitate to recommend it for a long-term investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.