Exxon Mobil: Bull or Bear?

Down nearly 20% from its 52-week high, Exxon Mobil’s (XOM) stock has become quite controversial after reporting 2Q08 results (see conference call transcript). I like controversy because it may yield investment opportunities.

Here are the key issues, both bull and bear, as I see them.

The Bear Case:

1. Exxon’s earnings disappointed investors for the second consecutive quarter. While the company turned in record earnings at $2.27 per share in 2Q08, results were markedly below the Street’s consensus estimate of $2.52 per share.
2. Production has been declining. On an oil-equivalent basis, production dropped 8% from 2Q07, and this was on top of a 5.6% year-over-year decline in 1Q08. Even excluding the Venezuela expropriation, the Nigeria labor strike and lower entitlement volumes (higher oil prices result in lower production volumes under production sharing contracts), production still would have been down 3% in 2Q08. Exxon is a no growth company with a depleting asset.
3. The pressures of nationalism in oil producing countries are weighing on the super-majors’ ability to find oil to replace reserves, let alone grow, and successfully manage existing operations in those countries. Venezuela’s expropriations and Russia’s hostile actions against Shell and BP highlight this trend. Will the Russians go after Exxon next? Exxon and all the super-majors are at a competitive disadvantage with state owned oil companies. The violence in Nigeria takes the risks facing these companies up another notch. And the pressure is on to take more taxes from the oil industry in the U.S.
4. High oil prices have been a double-edged sword, as downstream earnings were crushed in 2Q08. Hurt by weak refining margins, Downstream earnings dropped 54.1%. Chemical earnings fell 32.2%.

The Bull Case:

1. Oil is a necessity, and Exxon has plenty of it. The largest reserve base in the industry, proved reserves totaled 22 billion oil-equivalent barrels at the end of last year. Exxon has replaced more than 100% of production for 14 years running. The reserve replacement ratio was 101% in 2007. Long-term, Exxon has 50 billion oil-equivalent barrels, 30 years of production at 2007 levels, yet to develop. That Exxon is a no growth company with a depleting asset may be greatly exaggerated.
2. Exxon has immense financial resources. Cash has been flowing onto the balance sheet with cash and marketable securities growing to $39.7 billion at the end of 2Q08, up $5.2 billion from year-end 2007. Long-term debt was only 5.5% of total capital.
3. Exxon is a huge cash generator. Cash flow from operations was $52.0 billion last year, and a whopping $34.8 billion in the first half of this year, up from $25.6 billion in the same period in 2007. Excluding capital expenditures, free cash flow was $36.6 billion in 2007, and $26.0 billion in the first half of this year, up from $18.7 billion in the same year earlier period. 
4. Exxon is a highly profitable company. Return on equity in the latest trailing 12-months was 36.2%, well ahead of the industry’s 27.0%.  Asset utilization or sales / assets (1.9x versus 1.4x for the industry) and return on assets or net income / assets (17.6% versus 12.4% for the industry) are the return on equity components driving Exxon’s performance.
5. The stock has plenty of room for ratings upgrades and institutional buying power. Street opinion is mixed. Eight analysts are recommending purchase out of a total of 16 analysts following the stock. Moreover, Exxon is not a favorite among institutional investors, as they own only 52% of the outstanding shares.
6. Exxon is a cheap stock. The shares are bargained priced at 8.2x this year’s consensus earnings estimate, well below the stock’s 5-year average of 13.3x and the S & P 500’s 15.4x.

What do I think? I put Exxon through my own comprehensive Company Stock Risk Profile research process spanning 50 categories of company fundamentals and stock valuation. The stock came out with a Low Risk rating, having failed 16 of the 50 categories (I define Low Risk as failing 0-17 categories).

Exxon is the kind of stock I want anchoring my portfolio, particularly when times are tough. The company produces a product that people need and use every day, and generates lots of cash.

I also believe we are fast approaching the era of “peak oil” and that Exxon’s large reserve base will continue to become ever more valuable.

Disclosure: I own Exxon.

Comments

[dickus]

Oil and gas seem to be an addiction affecting 100 percent of the world population. Certainly there will be cycles of demand as economies fluctuate and people and governments try to find alternative ways to feed their thirst for heat, transportation and manufacured products. Its hard to imagine that Exxon won't continue to be a standout in this industry and continue to grow and make a lot of money for its investors for quite a few years to come. In some respects oil is like tobacco in the 1950's and 60's. Some day will oil will certainly come to the end of its heyday, but hopefully Exxon will be in the forefront of the alternative. In the meantime we can enjoy the fruits, and I for one will hold Exxon as a key part of my portfolio for a few more years.

[lucky lenny]

Per last earnings release, Exxon is buying back about 100 mill shs per quarter. Given the tremendous drying up of shares outstanding; and the continued profits regardless which way the price of oil moves; I can't think of a safer long term, blue chip, stock to have in one's portfolio. XOM closed @ $77.07. Also, if u look in Exxon's annual report, you'll see 6.7 bill shs o/s on 12/31/03. Versus 5.6 bill shs o/s on 12/31/07. That's a 1.1 bill share reduction. During this timeframe, Exxon's profits and equities have swelled.

Unfortunately, the biggest threat to Exxon's long-term survival is probably political risk. Namely, if Barack Hussein Obama wins, Exxon and others are in trouble. Barack Hussein Obama has said he is going to punish oil companies for high profits by over-taxing when he's elected President. If he does this, Exxon will produce less and profits will go down.

[ted. sr.miami]

exxon is good company someone in new jersey recomended me to by if i will like to receice dividens and stock splits that ocurs every couple years or so take advantage this company is a keeper

[ted. sr.miami]

good company to keep

[paulk8756]

Stuart,

Is Exxon a large NG producer, as well?

[paultaut]

Both, short term cautious long term bullish.

So XOM moves a couple of points lower, I believe its price is based on $80 dollar oil. $80 is a pipe dream in my opinion.

What they can do is pretty simple and they have already started. They are trying to sell all of their gas stations. A spin off of their Refineries may come next. This could be followed by reincorporation of the remaining company to a country which treats its assets favourably. Haliburton has already moved its headquarters to Dubai.

Back in the 70's, XOM had vast holdings in the USA, that is no longer the case. The Nitwits in Washington assume that Corporations do not have the right to defend themselves. They will learn the hard way.

[Alamo]

XOM is a curious beast. Its enormity renders it public enemy No.1 in many, if not most of Americans' minds--mine included.

I receive income from Exxon Mobil through royalty payments emanating from the petroleum engineering and geophysical excellence of the domestic predesessor to XOM, Humble Oil and Refining Company--as universally well thought of as XOM is currently despised.

As difficult as it is to put any kind of reliable figure on the illusory thing referred to as "goodwill", Exxon Mobil is, or should be at the bottom of the "barrell" (pun intended). Whether or not its the mere size of its operations--or the "operations" itself is unclear, but I think it is evident that XOM is an unloved beast. Their public image is perfectly reflected in the in your face, smash mouth, learn to live with it attitude so perfectly well perpetrated by its former CEO, Lee Raymond. When the nation--or at least people who try to keep up with what is going on saw Raymond's "performances&quo... before the Congressional committees, it left an outraged taste in most people's mouths. To be a mammoth is one thing. To be an unconcerned, smart ass mammoth is another. Raymond and other Big Oil executives came across exactly in the latter sense.

I noticed that the current Shell Oil Co. CEO recently concluded a nationwide tour in which he held town hall forums in order to ascertain what the national feeling abut Shell and Big Oil in general was. Tha was a very smart move in my opinion and whether or not it was directly related to the likes of 'snarlin, Lee's recent antics I don't know, but it was a necessary and timely fact-finding mission. At least one of the Big Oil group seems interested in what their public perception is. I doubt XOM does.

I seriously believe, and I think a majority of Americans believe as well, that the disastrous foreign policies of the Bush/Cheney Administrations were largely supported or internally orchestrated by Bg Oil's political influence. The degree of international intrigue associated with Big Oil and its non-stop effort to climb in bed with OPEC inescapably rubs off.
on all of the companies comprising thhat Big Oil group and especially so XOM. Now that their assets are being nationalized, their concessions cancelled and their exit visas handed to them, Americans view it as largely justified. If you choose to wrestle a hog in his pen you should not complain about getting dirty. So it is with Exxon Mobil. We no longer love Lucky Tiger because he's become way too much like a tiger. Or "unconcern" generates unconcern.

My feeling is that XOM is a dying beast--slowly dying, but dying nevertheless. The nation has seen the end of the era of crude oil a whole lot sooner than they did and with the Big 3 auto makers finally coming to the realization that their iron-clad association with XOM and the rest of Big Oil they are fast becoming the "Little 3" auto makers XOM had better accumulate all the considerable amounts of cash they can and are doing right now. But when what you peddle is increasingly becoming more scarce each and every day you can only raise the price so high before thinking people realize that there is a dead end ahead.

As Ralph Nader said, "If Exxon owned the sun, you can bet that we would have solar"! That's not only prophetic, it appears to have a lot of truth to it.

Exxon Mobil's dance with the devil is about done.

[DrT]

Being so unloved is what makes exxon cheap and a good investment. If you want popular buy a huge PE solar company.

[bindlepete]

There are problems with Exxon's reserves in that they are shifting towards natural gas which may well go into a " glut" mode with weak prices. The LNG business is good for setting a marginal price as long as there is a shortage but this may not persist.

Now Exxon used to hold a bunch of patents on the geopressured production but they will not outlast the shale gas production cycle.

Note how Exxon is moving out of the oil business such as refiery sales and gas station dumping.

I own some Exxon but I got it long ago and really cheap. Capital gains and age keep me from selling out.

[mkreisel]

Another bear case: 40% of XOM's exploratory wells are dry wells, compared to 25% at COP and 2.1% at CHK.

[Stuart J. Shaw]

paulk8756,

Exxon is a major producer of natural gas. Here's how Exxon compares to a few competitors in terms of natural gas production in 2007 in millions of cubic feet per day:

XOM 9384
CVX 5019
BP 8143
COP 5087

Stuart

[paultaut]

The only place Nat. gas is cheap is in the US. You have to remember that almost all of the homes built in the US between 2001 and present use Nat. Gas as the main energy source. With so many sitting idle, its no wonder that we have a NG surplus.

The last stats I saw were Nat. gas Eurozone of $14 and Asia a couple of bucks higher. Thats the reason LNG Companies are bleeding. What terminals have been built are idle.

Yes, millions of acres of leased land are sitting idle. So what? Congress got paid for said leases. The majors that bid for them got a "pig in the poke". Congress through its Environmental lobby and the EPA have stalled drilling on those leases. Drilling in International waters would sidestep the EPA. The onus of proof in the International Courts would be on the environmentals to prove damage something which they don't have to do here.

Meanwhile, only the large oil companies have the wherewithal to drill that far offshore. And drill they are, but they are not US companies. Everyone talks about Brazil's big find, no one talks about how far offshore it is.

[william meesit]

xom,bp,cvx i m wills

[kelhal]

Exxon and Railroad plays?

video: equedia.com/blog/view....