by Johnny Duncan
With natural gas prices finally starting to climb, companies like Exxon Mobil (XOM) -- that only a few years back began putting more of its capital toward the exploration and production of natural gas -- can finally reap the rewards. In fact, Exxon actually produces more natural gas than oil, more so than Chevron (CVX) and ConocoPhillips (COP), which still gathers most its profits from oil. Even so, Exxon is still the leader in the world of oil and gas companies with a $406.9 billion market cap and looks like it will hold that position for a very long time. Along with a super-strong foundation, a gazillion years of experience, the company also possesses very strong ties that allows the company to search the world for attractive investment opportunities. While fluctuating prices in both natural gas and oil can affect an investor's portfolio of oil and gas stocks, I firmly believe that including Exxon in the mix is simply smart investing. The proof of the ability of this company to stand tall for the long haul is based on the strong financials, the diversification of holdings, and the wisdom to curtail disaster before it happens.
Since Exxon recently announced a 21% dividend boost in consolation, which brings the yield on the shares now to about 2.6%, the company now pays out more in dividends than any other company in the world. That enticement alone is almost enough to make for a strong case for investing, but there is more. The company reported first-quarter 2012 earnings of $2.00 per share, and reported annual 2011 earnings of $8.42 per share. It reported first-quarter 2012 revenues of $124.05 billion, 2.01% above the prior year's first-quarter results, and had revenues for the full year 2011 of $486.43 billion, 26.93% above the prior year's results, while net income improved 34.80% from $30.46 billion to $41.06 billion. In 2011, Exxon used $22.17 billion on investing activities and also paid $28.26 billion in financing cash flows. Additionally, the company increased its cash reserves by 61.84%, or $4.84 billion, and the company earned $55.35 billion from its operations for a cash flow margin of 11.38%. The company has a debt-to-total-capital ratio of 8.71%.
The company's safety procedures are some of the best, and some say some of the most extreme in the industry. After having suffered through the kidnapping and killing of Exxon vice president of international operations, Sidney Reso, in 1992 and the disaster with the Exxon Valdez oil tanker in Alaska's Prince William Sound in 1989, it is difficult to blame Exxon for taking drastic measures. Safety steps such as making it mandatory for employees to back into parking spaces for a quicker evacuation if needed, and prohibiting senior executives from flying commercial airlines are just a couple examples of the importance placed on safety. Now, every meeting at every office must begin with a "safety minute" allowing employees to provide safety input and suggestions on how to make the work environment a safer place. This is paying off for the company. While oil and gas exploration is naturally a risky business, Exxon has been persistent in keeping up a somewhat clean safety record. This translates into savings for the company: savings in the cost of cleanups, salvaging reputation, changing marketing direction, and so on, similar to what BP (BP) has gone through these past couple of years.
Unfortunately, mistakes still do happen like the cleanup Exxon jumped on right away after the 80,000 gallon oil spill on April 28 in Pointe Coupee Parish, northwest of Baton Rouge, La. A few days later, the company was able to restart a portion of that pipeline, getting production back on track. Exxon is also keen on doing preventative maintenance on a regular basis for both safety and efficiency reasons. The company recently shut down a French refinery for extensive maintenance. A strong focus on prevention and a quick response when disasters happen is helping the company to keep profits and share profits while maintaining a good reputation.
While Exxon focused on natural gas plays, oil-equivalent production decreased more than 5% from the first quarter of 2011, but the company is still seeking oil across the globe with promising partnerships with Russian state oil company Rosneft (GM:RNFTF) and Argentinean energy company, YPF SA (YPF). Just these two combined are showing promising signs of billions of barrels in oil-equivalent terms. The company is keeping to its promise of investing $150 billion over the next five years for the exploration and production of both oil and natural gas. The company's CEO Rex Tillerson stated last month that "huge investments are needed to expand the supply of traditional fuels like oil and gas while also advancing new energy sources."
Getting to the crude is becoming more difficult and more costly than ever before. Companies like BP, Chevron, and Royal Dutch Shell (RDS.A) are all having the same difficulties. However, the main difference for Exxon is that the company has earmarked a larger war chest increasing the capital budget for exploration spending by $37 billion per year, or 29%, from 2012 to 2015. Exxon's belief that natural gas will replace coal as the second most popular fuel by 2025 is the driving force behind the search for the gas. With current exploration and increased production, the company stands to profit nicely with rising natural gas prices.
With an impressive balance sheet and the ability to continue growing worldwide, Exxon should continue to outperform the market for a very long time. At the same time, the company offers shareholders a steady stream of income with its impressive dividend payout and even more impressive exploration plays. Based on the above information, I see Exxon Mobil trading in the low $90 range by next summer.