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Despite experiencing a volume decline of 5.6%, Exxon Mobil (NYSE:XOM)'s continued investments in new projects are likely to bring growth in the company's volumes. Based on the following facts, we have a bullish stance on the stock:

  1. The stock is trading at a current P/E of 9.7x, which is at a discount when compared to its last five years average P/E of 11.4x.
  2. The restructuring of its downstream and chemical operations bodes well for its future prospects. According to the estimate of 21 analysts, its earnings will grow by 8% by the end of 2013.
  3. The company has spent $7.7 billion in the share repurchase program and dividend payments to its shareholder.
  4. One of XOM's mega projects, Kearl, is expected to be operational by the end of 2012. Moreover, 21 oil and gas projects are in the pipeline, which will enhance the company's capacity to 1 million barrels of oil equivalent per day by 2016.
  5. Due to the increasing uncertainty in the U.S. oil and gas market, Exxon Mobil has completely shifted its exposure to non-U.S. markets to mitigate its risks. The shift brings upstream and downstream revenues of 92% and 87%, respectively, from non-U.S. markets.
  6. Going forward, the management's decision to invest $37 billion every year in capital and exploration spending, for the next five years, will help it tap into the growing energy demands of the world, and increase its volume generation capacity.

XOM is involved in the exploration, production and development of oil and gas. It is also doing marketing for, and making sales of, natural gas, crude oil and petroleum products. The company has many divisions, and is the parent company of Esso, Mobil and Exon.

Due to the recent power outages in the company's Torrence refinery in California, gas prices soared up to a record high of $4.61 per barrel. Previously, the market has seen the peak of $4.6/ barrel back in June 2008. One of the stations in LA is selling at the highest price of $5.49 per gallon. The power outage had taken place due to power shutting down in the Southern California Edison substation. The company restarted its operations last Friday, and we believe the resumption of its operation will bring stability in gasoline prices, and enable the company to meets its contractual commitments.

In our opinion, Exxon's recent collaboration with Rosneft (OTC:RNFTF) is a positive sign for investors. Through this partnership, the two companies aim to discover hydrocarbon reserves of around 85BBOE in the Arctic. However, we cannot disregard any potential political connotations. Any political disagreement between Russia and the U.S. will have an adverse impact on the partnership.

The company's recent development projects will help generate more revenue. Its joint venture partnership with the Saudi Basic Industries Corporation will further enhance its capacity to meet emerging energy needs. Furthermore, the company has filed an application for the expansion of its petrochemical facility on the U.S. Gulf Coast in 2016. Its current operations of 10 rigs in the Bakken field and oil production from the Kizomba project in Angola are considered highly productive.

Financials:

The company's earnings have increased to $15 billion in the second quarter of 2012, as compared to $10 billion in the same period in 2011. Its net income and EPS have improved by 49% and 56%, respectively, over the course of the last year. Its capital and exploration spending have reached new heights, with $18.2 billion spent in the last six months.

Direct Competitor Comparison

Exxon Corporation

Marathon Oil Corporation (NYSE:MRO)

Chevron Corporation (NYSE:CVX)

BP (NYSE:BP)

Market Cap:

426.05B

21.92B

230.06B

139.11B

Qtrly Rev Growth (yoy):

-7%

1%

-10%

-8%

Gross Margin (ttm):

29%

59%

30%

13%

Operating Margin:

11%

33%

16%

6%

Exxon Mobil's gross and operating margins of 29% and 11%, respectively, are higher than those of BP, at par with Chevron Corporation, and lower than Marathon Oil Corporation. In the second quarter, the company's natural gas production was around 11, 661 million cubic feet per day. The company's cash flows from operations and sale of assets are $13.9 billion. It has paid a dividend of $0.57 per share, which increased by 21% over the last one year.

Valuation:

Direct Competitor Comparison

Exxon Corporation

Marathon Oil Corporation

Chevron Corporation

British Petroleum

P/S:

0.98x

1.47x

1x

0.37x

Forward P/E (2013)

11.2x

7.4x

9.3x

8x

The stock is currently trading at 1x to its sales, at a discount when compared to Marathon Oil Corporation's P/S of 1.47x, and at a premium when compared to BP's P/S of 0.37x. BP's low valuation reflects a value trap, as the company has been going through litigation for the Macondo disaster, and expects fines of up to $20 billion. BP's poor financial performance is reflected in its decreasing aromatics, refinery, gross and operating margins. Moreover, XOM is trading at a forward P/E of 11.2x, as compared to the industry average of 8.9x.

The stock also offers a dividend yield of 2.5%.

Source: Exxon Mobil's Growth Prospects Make It A Buy