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Who’s Betting on Exxon: Buffett and Soros

|Includes: Exxon Mobil Corporation (XOM)
Exxon Mobil Corporation ("ExxonMobil") looks like a good bet to outperform the market long-term for investors expecting either higher oil and gas prices, global economic growth, geopolitical crisis, or a long-term decline in the value of the dollar. Apparently, Warren Buffett and George Soros share the belief of higher oil prices in the not too distant future, both Buffett’s and George Soros ‘s SEC Forms 13-F for the quarter ended December 31, 2009,included ExxonMobil. 
The positions of Buffett and Soros in Exxon are logical considering that ExxonMobil’s currency is oil and gas and that currency may be a better long-term hedge against depreciation of the U.S. dollar than gold and the hedge pays a dividend. Additionally, for the past decade, ExxonMobil has outperformed the market and produced a total return of 8.2% compounded annually for shareholders, which is far more than can be expected from the market from today’s 1200 price level. ExxonMobil may be the lowest risk way to benefit from higher oil and gas prices. If oil prices do not rise, based on historical performance, Buffett and Soros can expect to be paid an 8.2% compounded annual return for placing their bets on ExxonMobil. The return is far higher and the risk probably less than owning U.S. Treasury Bonds. Moreover, Wall Street estimates provide a good insight into the upside for the stock if oil and gas prices rise: ExxonMobil share price estimates for 2010 to 2012 as function of oil prices per barrel: XOM $80 (oil $80 & gas $7.50 mcf); XOM $35 (oil $35 & gas $5.00 mcf) and XOM $205 (oil $150 & gas $15 mcf).
While the above information provides a good summary of why Buffett and Soros are betting on ExxonMobil, now is a good time to look at the stock a bit further and find out why it is in the portfolios of these two famous investors.
Exxon Mobil at a Glance
ExxonMobil was founded in 1870 and is based in Irving, Texas. ExxonMobil is the world’s largest integrated oil and gas company (explores, produces, and refines oil) and represents 2.7% of the capitalized value of the S&P 500 Index. The company operates in the United States, Canada, Europe, Africa, the Asia Pacific, the Middle East, Russia/Caspian region, and South America.  (For the first quarter of 2010, 75% of earnings came from foreign markets). In 2009, it produced 2.4 million barrels of oil and 9.3 billion cubic feet of natural gas a day. At year end, reserves were equivalent to 22.98 billion barrels of oil. ExxonMobil is the world’s largest refiner with 37 refiners and the world’s largest manufacturer of commodity and specialty chemicals. ExxonMobil’s credit rating is AAA and its balance sheet and credit rating provide it with the capacity to undertake acquisitions and large global projects without selling equity and diluting existing shareholders. 
Current Market Stats
Exxon Mobil Corporation (NYSE: XOM), $67.77, P/E (ttm) 13.83, Earnings Per Share (ttm) $4.90, Market Cap $320.0 billion, Dividend & Yield ($1.76 & 2.6%). Wall Street analysts forecast earnings for 2010 of $5.79 per share fully diluted and a target price of $80.00 per share. 
ExxonMobil First Quarter, April 29, 2010, Financial Results
ExxonMobil's first quarter 2010 earnings were $6.3 billion, an increase of $1.8 billion from the first quarter of 2009, reflecting an increase in crude oil prices and strong chemical results, partly offset by lower natural gas realizations and continued depressed downstream margins. Earnings per share were $1.33, up $0.41 from a year ago. These results include a charge of about $200 million or $0.04 per share, associated with the U.S. healthcare legislation signed into law in March of 2010.
During the first quarter of 2010, ExxonMobil distributed nearly $4 billion to shareholders, including dividends of $2 billion and share purchases to reduce shares outstanding of about $2 billion.
The effective tax rate for the fourth quarter was 50%. At the end of the first quarter, cash balance was $13.7 billion and debt was $9.5 million.
ExxonMobil announced an increase in the quarterly dividend of nearly 5% to $0.44 per share. ExxonMobil has paid a dividend each year for more than a century and has increased its annual dividend payment for 28 consecutive years.
CapEx on the first quarter was $6.9 billion, an increase of 19% from first quarter 2009. ExxonMobil continues to invest in robust projects through the business cycle to help meet global demand for crude oil, natural gas and finished products.
The XTO Energy transaction remains subject to final regulatory clearance and approval by the shareholders of XTO Energy, but it is expected to close in the second quarter.
In sum, these results reflect the strength of ExxonMobil's business model. Management remains confident that its long-term perspective, financial strength and disciplined investment approach will continue to deliver superior, differentiated results and positions ExxonMobil well for the future.
ExxonMobil Bulls vs. Bears
Bulls say: ExxonMobil has superior management, global footprint, integrated upstream and downstream operations, and has consistently outperformed the market long-term and rewarded shareholders with higher returns on equity than competitors and returns have been shared with shareholders by increasing dividends and share buy-backs. Bears say: ExxonMobil’s production has been relatively flat for the past several years and reserves have been declining at about 5% to 6% a year, oil exploration has shifted to underdeveloped areas of the world where National Oil Companies plan to develop the reserves without partners making it harder to grow, and a drop in the price of oil will cause profits to decrease. Yes, all are possible risks, but any negatives are already priced into the stock price. Moreover, management has the smarts and the financial resources to deal with any of the negatives if any risks are realized.
ExxonMobil Stock Price Potential
Global oil production is forecast to peak in 2011-2012 at about 90 million barrels per day. Some forecast that between 2011 and 2015 a gap between supply and demand of 10.0 million barrels per day will exist causing a steep increase in the price of oil. Nevertheless, without any gap, the price of oil will increase as global economic growth increases demand for oil and geopolitical risks add fuel to the fire for higher oil prices. The long-term trend for the U.S. dollar is down. Oil is priced in dollars and any decline in the value of the dollar should be a positive for ExxonMobil with its diversified global operations. Given the inelastic demand for global oil, any short-term dollar appreciation will lower foreign operating costs and have a positive impact on earnings.

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Disclosure: Long XOM