While grappling with problems like falling oil and gas prices, ExxonMobil Corporation (XOM) is also diversifying its assets, acquiring non-conventional energy properties. Exxon's biggest challenge is to deal with the downward spiral of gas and oil prices. These factors have already impacted its earnings in previous quarters and the woes are likely to continue for the foreseeable future. While the company still maintains impeccable fundamentals, I am concerned about the impact of falling oil prices on the company stock price, which has had a pretty good run from June this year. The stock recently touched its 52-week high of $92.50, so let's take a look to see whether it is time to book a profit or stay put.
If I had to pinpoint the single biggest sore point for Exxon, it would be the concern about future price movement of oil and gas. For its second fiscal quarter, the company reported a 49 percent increase in its net income but I cannot ignore the underlying fact that most of the increase actually came from asset sales worth about $7.5 billion. If we exclude the income from asset sales, then the company's profit actually registered a 22 percent decline. Exxon not only suffered from declining oil and gas prices but also produced less during the quarter. But despite relatively poor results, the company stock has been steadily climbing since then.
Exxon has interest in both upstream and downstream markets. So, some of its pain is counterbalanced. While its upstream business gets hurt by oil and gas prices going south, its marketing and refining business tends to benefit from the drop. As for the positive points for the company, Exxon is looking to meet the challenge by improving its efficiency. The company is focusing on both gas and oil and is paying particular attention to shale gas resources. Exxon had long been investing in perfecting technology for shale exploration and now it is paying off. The company makes about 50 percent of its total production from natural gas.
Exxon is also expanding its shale property portfolio. It has upped its stake in the unconventional oil play with its recent deal with Denbury (DNR). The company paid $1.6 billion in cash for acquiring Denbury's stake in the Bakken Shale reserves. Exxon is also giving up its interest in the Hartzog Draw field and Webster field for this purchase. While Denbury stock jumped on the announcement of the transaction, Exxon stock reacted largely negatively to the news. The deal provides a glimpse about the future course of action the company might take. It shows that Exxon is now inclined to acquire proven reserves, instead of performing prospecting analysis on its own. It has also been shown that in the long run, acquisition of proven reserves turns out to be more economical. The strategy is becoming popular throughout the industry. Exxon is also going ahead with its plans in the Arctic area and I have absolutely no reason to doubt the company's R&D efforts and technological expertise.
While Exxon's operational capabilities are proven and it continues to be efficient, let's have a look at the financial metrics of the stock. The company stock is currently trading at a Price-to-Earnings ratio of 9.68. In comparison, its competitor Chevron (CVX) and BP plc (BP) are trading at a Price-Earnings ratio of 8.79 and 8.01 respectively. By this measure, the stock is slightly overpriced vis-a-vis its peers. However, the premium is easily justified by the leadership position of the company in its segment. The company's exposure to upstream as well as downstream business also boosts its ability to cushion price fluctuations. Exxon's investments in its gas business are also likely to yield positive results as natural gas continues to increase its importance in the global energy mix. Exxon also has a profit margin slightly above 10 percent, which is better than BP's measly 4.5 percent.
The stock is currently trading precociously close to its 52-week high price of $92.50. It is a strong indication that the stock is in bullish phase since it is trading above its short-term as well as long-term moving average prices. The stock has been steadily growing from the past three months and had good volumes to support its uptrend. Exxon shows a bullish trend on its chart as at 73, its Relative Strength Index is pretty attractive. While I would wait for the stock to pull back to form a new position, if you already hold this stock then you should consider holding it and riding the upward wave.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.