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Exxon Mobil Corporation

Executive Summary:

Exxon Mobil (NYSE:XOM) offers one of the highest dividend yields in the Energy Sector. The company's attractive valuations, new exploration activities, a strong balance sheet and cash flows, and continued share repurchase activities warrant an overweight stance on the stock.

However, the global slowdown in economic activity and the EU debt crisis remains a key risk to our investment thesis.

Stock price Drivers:

The stock price drivers for Exxon Mobil include international oil prices, technological advancement in the extraction methodology, reducing the cost of extraction and increasing oil production, identification and procurement of high yielding formation fields, OPEC output of oil, refinery margins and the dividend yield offered by the stock.


(Click to enlarge)

From the above graph it can be seen that the 2009 dip in oil prices affected revenue and earnings the most. However, stock prices were not affected as severely due to the consistency in dividend growth provided a cushion for stock prices.

Upcoming Catalysts:

The upcoming catalysts that will move the stock price include the slowing growth in the U.S. and China, and the Euro debt crisis. Any negative or positive movement on this front will drive oil prices internationally, which will directly affect the earnings and stock price of Exxon Mobil.

Another catalyst could be the decision of OPEC with regards to the output of oil.

Tensions between the U.S and Iran have simmered down ever since Iran agreed to allow IAEA inspectors to visit its nuclear sites. Any conflict going further with regards to Iran's ambition to acquire nuclear weapons will direct the prices of oil in the international markets.

Exxon Mobil announced that it planned to build a new U.S. Chemical Plant in Texas to take advantage of cheap North American shale gas. Exxon Mobil Corp and Rosneft' NK OAO (OTC:RNFTF) unveiled an offshore exploration partnership on Wednesday, which could invest up to $500 billion in developing Russia's vast energy reserves in the Black Sea and the Arctic. The recoverable hydrocarbon reserves are estimated at 85 billion barrels in oil-equivalent terms, and it is expected that Exxon and Rosneft' will seek to develop three fields.

The company unveiled its plan that it intends to continue its share repurchase plan and acquire $5 billion worth of shares from the open market or through negotiated transactions.

The Bullish thesis:

Exxon has been outperforming the Energy Sector ever since it declared a dividend increase of 21% in 2Q2012, compared to the previous quarter's figure, and has seen increased investor interest due to its dividend yield, which is higher than its 10-year average.

If the slowdown in the U.S. and Chinese economies is reversed and the European Union debt crisis is resolved, oil price could revert to levels of $100/bbl. In such a case, the stock price could target a price of $101/share.

The Bearish thesis:

Oil prices have dropped by an approximate 20% since the debt crisis in the European Union intensified and the slowing signs of growth from the U.S. and China.

Since oil prices and profitability are highly correlated, any negative development on this front would drive down earnings as well as the stock price. However, historically, OPEC producers adjust their output according to the economic scenario to support oil prices.

If all negatives kick in and the prices of oil drop further, then the stock could trade below $70/share.

Company description:

Exxon Mobil, with the largest market capitalization, is the largest publicly traded international oil and gas company and has a market capitalization of $377 billion. Exxon Mobil holds an industry-leading inventory of resources, and is the largest refiner and marketer of petroleum products, with its chemical company being one of the largest in the world.

Market Performance:

Oil prices hiked up to 20% in December 2011, primarily due to the tension and possible blockade of the Strait of Hormuz (Iran) from where 20% of the world's oil passes. Therefore, the Energy Sector outperformed the S&P500 from the beginning of CY12 up till March. In March, oil prices dipped due to increased concern over the EU debt crises and Iran's affirmation to allow IAEA inspectors visit its nuclear sites.

The stock of Exxon Mobil's performance lacked that of the energy sector up till April due to the negative EPS growth of 6.5%. However, in April the company announced that it has declared a cash dividend of $0.57 per share on the Common Stock, payable on June 11, 2012 which was 21% higher than its 1Q12 dividend of $.47/share. Nevertheless the stock has underperformed the S&P500 throughout CYTD. Also, the company bought back $5 billion worth of shares from the market which may have provided some support to the share price.

Latest earnings review:

The consensus earning expectation of the EPS for the 1Q12 were $2.09, while the company announced EPS of $2.00, which missed the earning expectations.

The reason for the company to report a lower EPS than expected was due to the production decline in upstream revenues.

Financial performance review:

The total earnings for Exxon Mobil have decreased YoY and are approximately flat QoQ.

Earnings for the different segments

1Q12

1Q11

Upstream

United States

1,010

1,279

Non-U.S.

6,792

7,396

Total

7,802

8,675

Downstream

United States

603

694

Non-U.S.

983

405

Total

1,586

1,099

Chemical

United States

433

669

Non-U.S.

268

847

Total

701

1,516

Corporate and financing

-639

-640

Net Income attributable to ExxonMobil (U.S. GAAP)

$9,450

$10,650

EPS

2.00

2.14

*Source: 10Q

Upstream Earnings and production:

Earnings decreased by $873 million, which reflected higher operating expenses, lower volumes and the absence of asset sales, partly offset by stronger oil and gas realizations. On an oil equivalent basis, total production decreased over five percent from the 1Q2011. Oil production totaled 2,214kbd (thousands of barrels per day), down 185kbd from 1Q2011, while the first quarter natural gas production was 14,036mcfd (millions of cubic feet per day), down 489mcfd from 2011, mainly due to field decline and divestments.

The percentage of proven developed reserves was 65 percent of total proved reserves at year end 2011, and has been over 60 percent for the last five years, indicating that proven reserves are consistently moved from undeveloped to developed status.

Downstream earnings and production:

Earnings increased by $487m due to refining optimization and higher gains on asset sales, which more than offset the decline in margins. Petroleum product sales of 6,316kbd were 49kbd higher than last year's first quarter.

Exxon Mobil's downstream is a large, diversified business with refining and marketing complexes around the world. Exxon Mobil has an ownership interest in 36 refineries, located in 21 countries, with distillation capacity of 6.2 million barrels per day and a lubricant base stock manufacturing capacity of 131, 000 barrels per day.

Exxon Mobil's long-term outlook is that refining margins will remain weak as competition in the industry remains intense, and in the near term, new capacity additions outpace the growth in global demand. In retail, fuels, marketing business and competition continue to cause inflation-adjusted margins to decline.

Chemical earnings and production:

Earnings decreased by $815mn, primarily due to lower margins and higher planned maintenance expenses. First quarter prime product sales of 6,337kt (thousands of metric tons) were 15kt higher than last year's first quarter.

Corporate and financing:

Corporate and financing expenses were $639 million for 1Q2012, which were almost flat YoY.

Cash and Liquidity position:

Liquidity and Capital Resources

1Q2012

1Q2011

Net cash provided by/(used in)

$M

$M

Operating activities

$19,287

$16,856

Investing activities

(5,351)

(5,353)

Financing activities

(8,130)

(6,749)

Effect of exchange rate changes

200

254

Increase/(decrease) in cash and cash equivalents

6,006

5,008

Cash and cash equivalents (at end of period)

18,670

12833

Cash and cash equivalents - restricted (at end of period)

477

401

Total cash and cash equivalents (at end of period)

19,147

13,234

Cash flow from operations and asset sales

Net cash provided by operating activities (U.S. GAAP)

19,287

16,856

Proceeds associated with sales of subsidiaries, PPE, and sales & return on Inv

2,513

1,341

Cash flow from operations and asset sales

21,800

18,197

Source: 10Q

From the table above, it is evident that the company has ample liquidity for investment and financing activities in the future, and most importantly, the company is generating net cash inflow from operations (with and without sale of assets). The company has total cash and cash equivalents of $19.1 billion at the end of 1Q2012 compared to $13.2 billion at the end of 2Q2011. The cash outflow from financing has increased due to higher dividend payout and share repurchase of $5 billion.

Exxon has a high net profit margin of 8.68%, enjoys one of the highest returns on assets of 13.32% and has a return on equity of 26.6%. It has a debt to equity ratio of 33% and an interest coverage ratio of 4.7x.

Valuation:

Exxon

Industry

P/E (NYSE:TTM)

9.75

9.41

Est. PEG Ratio

2.03

1.02

P/S

0.85

0.72

P/B (mrq)

2.40

1.90

Dividend Yield

2.83

2.35

Exxon trades at a higher P/E multiple of 9.75x in comparison to the industry P/E multiple of 9.41x, a more expensive PEG of 2.03 in comparison to the industry PEG of 1.02, and a higher P/S of 0.85 compared to the industry P/S of 0.72. It offers a higher dividend yield of 2.83% than the industry dividend yield of 2.35%.

Sell Side Expectations/Review:

The earnings expectations have been revised downwards by analysts, and the consensus 2Q2012 EPS has been revised to $2.05 from $2.08, while the 3Q2012 EPS has been revised downwards to $2.00 from $2.06 in the last one week, due to economic conditions in China, U.S. and the EU debt crisis.

Discussion on competitors:

The major competitors of Exxon include Chevron Corporation (NYSE:CVX) and ConocoPhillips (NYSE:COP).

Chevron Corporation trades at a P/E and a P/B of 7.4x and 1.6x, offers a dividend yield of 3.57% and enjoys a net margin of 10.65%. It is involved in the exploration and production (Upstream), refining, marketing and distribution of oil and its products (Downstream), and the production and distribution of chemicals and petrochemicals in the U.S. and abroad.

ConocoPhillips trades at a P/E and a P/B of 5.92 and 1.06, offers a dividend yield of 4.89% and enjoys a net margin of 4.98%. It is involved in the exploration and production (Upstream), refining, marketing and distribution of oil and its products (Downstream), and the production and distribution of chemicals and petrochemicals in the U.S. and abroad.

Conclusion:

Based on the aforementioned fundamental factors, relative valuations and higher dividend yield, we have an overweight stance on Exxon Mobil.

Source: Buy Exxon Mobil: High Dividend Yield And Cheap Valuations