Exxon Mobil (XOM:NYSE) is one of the largest publicly traded oil exploration companies and as such is often considered a safety net for an energy play. That continues to be the case after Exxon did not experience the same price plummets other notable E&P names saw after oil prices tumbled from their heights in 2014. However, as WTI has risen 40% since January lows, Exxon's stock is up only 20% over the same period. That is not a case for concern, but rather a signal of the faith in Exxon to make it through this downturn.
The fact remains that the Exxon balance sheet is one of the strongest in the industry, boasting $5.0 billion in cash at a time when 27 E&P players have already declared bankruptcy this year alone. Exxon is in a position to use their cash to acquire assets from companies that were over-leveraged for a $40.00 per barrel oil environment. If that were not enough, Exxon is also slated to be part of the IPO for the $2.5 trillion gas giant Saudi Aramco. With a great management team and strong assets in place, now is the time to get into XOM.
All About the Fundamentals
Unlike many of its competitors, Exxon Mobil has been weathering the low crude environment and remains cash flow positive. First quarter earnings came in at $0.43 per share, well above consensus earnings of $0.31. Revenue also came in above consensus at $48.7 billion, beating estimates of $48.1 billion. Exxon has used its cash flow to increase its dividends, which it has done for 33 years, by $0.02 to $0.75 per share. Shareholders currently receive a 3.40% dividend yield, which is well above the 2.00% overall market yield. Exxon's balance sheet strength implies the company can safely protect their dividend increase tradition. With one of the best dividend track records in the industry, and a slightly below industry average price to book of 2.158, Exxon can be a great portfolio addition to either a value investor or as a core holding.
Exxon's management team has put the company in an advantageous position by making sure the company is well diversified. While their upstream business has suffered on the bottom line like all exploration business units have, refining operations have boomed during the oil glut. Exxon's downstream unit contributed $900 million in profits to first quarter earnings, half of their quarterly total. The chemical unit actually grew, and now accounts for 16.00% of total revenue. Even with low crude prices, Exxon has been able to expand their exploration operations. This past quarter, production was up 1.80% year-over-year. Capital expenditures are expected to decrease 25.00% this year, which does not bode well for short-term production gains, but is a great sign that management is focused on long-term value creation, which is in the best interest of its shareholders.
With WTI coming down 50% off two year highs, Exxon has been one of the few E&P players well positioned to take advantage of market conditions to make acquisitions at a discount. At least that has been the prevailing theory for the last year or so, as investors have patiently waited for the acquisition(s) to come. Well now is the best time yet, as oil prices rise while energy companies are going bankrupt at a rate of 1 every 3 days as of April. The companies going into bankruptcy are getting bigger, as the year-to-date total debt defaulted on already matches all of last year.
According to Deloitte, about 175 gas companies are at risk of insolvency. Bernstein Research estimates that by 2019 markets are expected to see more than $70 billion in defaults, which indicates that we are only halfway through oil bankruptcies. Luckily for Exxon shareholders, management has amassed a $5 billion war chest along with an AA+ rating, just as the industry appears to be cresting in bankruptcies. This is the perfect opportunity for Exxon to add assets on the cheap to improve shareholder value, and help XOM outperform a stagnant stock market.
Saudi Arabia is the largest exporter of oil in the world, accounting for 17.00% of total world exports. Exxon is in a position to get drilling rights as part of an investment in state-owned oil giant Saudi Aramco. De facto Saudi Arabian leader Deputy Crown Prince Mohammed bin Salman has an economic plan to diversify a country that receives over 70.00% of its revenue from energy. In order to raise capital to invest in new ventures, the Saudi Prince plans to sell somewhere near 5.00% of Aramco. Exxon is one of the 3 companies reported to be offered IPO of the $2.5 trillion behemoth that is the most valuable company in the world. In addition to an ownership stake, investing companies are reportedly receiving "special privileges" in the country, aka drilling rights. Well if oil prices remain depressed and OPEC is seeking to put production caps on member states, is this even a big deal?
In a word, YES this is a big deal for Exxon. Prince Salman ostensibly forced out the oil minister because he did not agree with the minister's stance on freezing oil production. It is no secret that Saudi Arabia is in the midst of a cold war with Iran, and energy is as good of a tool as any to use against Iran. The Saudi ruler wants to put an end to Iran's oil flooding the marketplace and eating away at Aramco's market share. Its hold on Chinese, South African, US, Japanese, and Indian markets has been weakened thanks to increased exports by Iran as well as close ally Russia.
Chinese oil imports from Saudi Arabia fell from more than 19.00% in 2013 to about 15.00% in 2015, with imports from South Africa falling from 53.00% to 22.00% over the same period. The Prince wants to pump as much oil as he can to get back market share. So while a supply gut may push oil prices down in the short-term, added exposure from Saudi Arabia can really help Exxon boost their top line and bottom line if they can get a piece of the action.
Exxon has an opportunity to not only weather this inclement energy environment, but to actually set itself up to flourish under higher energy price conditions. Having a diversified revenue stream allows Exxon to post positive earnings unlike many in the industry. Additionally, their 33 years of consistent dividends makes it one of the safest income streams for any investor. Their positive cash flow and high credit rating will likely lead to value acquisitions to strengthen the company's exploration assets. Not only can they grow the top line through acquisition, they also have an opportunity to capture drilling rights in Saudi Arabia and capitalize on an ownership stake in one of the most valuable companies across the globe. By benefiting from these tailwinds combined with higher energy prices, Exxon should easily be able to rebound to $100 per share in the coming months thanks to the leveraged upside of the upstream division. If you want to make a play in energy while oil prices are relatively low that will exhibit solid long-term value, XOM is the safest play to pursue.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.