The price movement of oil and gas is heavily monitored as it affects almost all aspects of our lives. It goes without saying that the U.S. economy is greatly affected by oil and gas price changes. When prices go up, consumers' energy and petroleum bills go up, limiting their ability to buy other goods and services. For the industry, an oil and gas price hike means more expenses in logistics and power usage. These extra costs are then passed onto consumers that makes merchandise more expensive, which again causes consumers to buy less goods and services. When there are large oil and gas reserves, the economy receives some stimulation, because prices for petroleum and natural gas drop.
At the beginning of the year, West Texas Intermediate Crude prices were above $140 per barrel, creating speculation that there might be a replay of the 2008 oil crisis. On June 21, 2012, amid the uncertainties in the global economy, West Texas Intermediate Crude fell to $78.20 per barrel, the first settlement below $80 since October 2011. Its London counterpart, Brent Crude, also settled below $90 for the first time since December 2010, at $89.56 per barrel.
In this article, I will focus on Exxon Mobil (XOM), the largest oil and gas company and largest natural gas producer in North America. It has 46 refineries in 26 countries and a production capacity of 6.3 million barrels per day. It is the largest oil refiner in the world, followed by Royal Dutch Shell (RDS.A), with a production capacity of 3.2 million barrels per day. Exxon Mobil has refineries in North America, Europe, Asia and the Middle East.
Exxon's stock price has not been heavily affected by the recent drop in oil prices. The stock has maintained a 200-day moving average of $84. Its peers in the oil industry did not fare so well. On June 20th, for example, Shell experienced an 11% reduction in its share price to around $65. BP (BP) has seen a drop of around 14% in its share price, from $44 at the start of the year, to around $40 today. Similarly, Carrizo Oil & Gas (CRZO) dropped more than 28% since the beginning of the year, to around $23. Natural gas companies on the other hand, such as Dominion Resources (D) and Sempra Energy (SRE) have increased their share value around 2% and 22% from the start of the year, respectively. Dominion Resources' and Sempra Energy's share value increase was partly aided by natural gas deals with Japan to ease its energy shortage caused by the shutting down of nuclear reactors from the tsunami disaster.
When looking at the past five years, Exxon's revenue and earnings growth only fell in 2009, due to the low oil prices at the time. Yet, its stock price was not severely affected due to its consistency in dividends. Last May, Exxon raised its quarterly dividend to 57 cents per share from 47 cents, which equates to a 21% boost. Exxon also bought back $5 billion worth of shares from the market, which also helped stabilize the share value. Exxon has been outperforming the energy sector since then, and has caught the interest of investors due to the dividend yield, which is currently higher than its 10-year average.
Recent Oil & Gas Developments
Back in April, Exxon formed a partnership with Russia's Rosneft Oil, which gave the company access to the Arctic and Black Sea. Recently, both companies also signed a deal to develop Siberia's tight oil resources. By the end of May, Exxon Mobil announced that it plans to build a multi-billion dollar chemical plant in Texas. The move is seen as different oil and gas companies are showing interest in cheap North American shale gas. Dow Chemical (DOW), Shell and LyondellBasell Industries (LYB) also expressed intentions to expand their chemical operations.
Exxon valuation and market performance
Exxon Mobil has the largest market capitalization in the sector of around $384 billion, and an enterprise value of $380 billion. Its trailing 12-month (TTM) price to earnings ratio is around 9.92, which is slightly higher than the industry average of 9.40. For the first quarter of 2012, the company reported earnings per share of $2, 14 cents lower compared to the same period last year. Its reported revenue for the quarter totaled $124 billion, which marked a $10 billion increase from the previous year. Shares are currently trading around $84, with outstanding shares of around 4.68 billion. Exxon has an operating cash flow of $57.8 billion and a current ratio of 0.95.
Exxon is expected to earn around $8 per share this year, as the market prices for crude oil are expected to increase as the economy stabilizes. Earnings expectations for the second quarter of 2012 are around $2.05, primarily due to the worsening economic conditions in China, the U.S., and Europe. Exxon holds the largest privately held oil and gas reserve in the market, which puts it in a very stable position. Share prices have been fairly stable due to its reasonable dividend yield of 2.7%. The company has consistently raised dividends over the last decade. Exxon currently has a forward annualized dividend of $2.28, compared to last year's 97 cents. I believe buying and holding Exxon stock is a smart idea, as the world economy is stabilizing and oil prices are poised to increase in the future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.