Exxon Mobil (NYSE:XOM) has an enviable resource base, which is well-located geographically. Its management team is well-known for a disciplined approach to investment that is now delivering high, consistent returns to shareholders. I expect this will continue.
Vast Resource Base at Exxon's Fingertips
Exxon Mobil's resource base is very impressive for two key reasons. First is its size of around 90 billion barrels of oil equivalent (BOE), which is by far the largest resource base ever for XOM. Second, these resources are predominantly located in the Americas and thus are relatively secure and accessible.
Disciplined Investment Regime Makes for Higher Returns
Exxon Mobil is known for its disciplined approach to investment. Such discipline has been manifesting itself in the company's major projects over the past few years, delivering higher-than-average unit margins and requiring lower capex to sustain these margins.
Falling Crude Oil Price Less Negative for XOM Than Its Peers
Although it may seem illogical, XOM's Q3 2014 earnings profile was actually a net beneficiary of a lower crude oil price, which is mainly due to the scale of the company's downstream operations (refining and chemicals) in comparison to upstream (exploration and production) activities. This was highlighted in the Q3 numbers, as increases in downstream earnings more than compensated for lower upstream earnings, thus driving total group earnings higher despite a $9/bbl lower crude oil price year over year.
Going forward, this inter-divisional relationship will vary as the extent of the crude oil price fluctuates. But it is comforting to know that XOM's integrated refining and chemical operations are low cost/high return, and have an unequaled advantage in the industry due to economies of scale and this unique asset base. This should provide a cushion to earnings should the price of crude oil continue to fluctuate greatly.
Strong Free Cash Flow Generation Likely to Continue, Justifying My Share Price Target
As my model shows, I expect XOM to continue to generate strong free cash flow (FCF) in coming years -- the result of slight revenue growth, margin improvement, and a steady capex requirement. Uniquely, XOM's FCF profile fully covers its dividend guidance -- unlike most of its peers -- which is comforting for investors. Overall, I expect XOM to deliver over 9% compounded annual growth (CAGR) in FCF between 2014 and 2018, which when run through the DCF model gives an implied value per share for XOM of around $102. That represents some 12% upside from its Dec. 9 closing price.
As volatility in the price of crude oil increases -- driven by a stronger U.S. dollar and increasing supply -- I would highlight Exxon Mobil as a safe harbor for investors. This is due to its unique asset and operation base which is generating strong free cash flow and thus allowing XOM, in my view, to maintain its generous dividend policy for the foreseeable future. If you would like to some more thoughtful comments on XOM, I would recommend reading Alexander J. Poulos' recent article.
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The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.