Exxon Mobil: This Dividend Aristocrat Is Undervalued And Yields Over 4%

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About: Exxon Mobil Corporation (XOM)
by: Steven Fiorillo
Summary

XOM has an annualized payout of $3.28 making the effective yield of 4.13%.

By 2025 XOM sees a potential increase in earnings of 35% with just a $40/bbl price and at $60/bbl earnings could increase by 135%.

Exxon Mobil recently made their 10th discovery off Guyana and raised the overall resource estimate for the to 5 billion barrels of oil equivalent boe.

The global energy demand is expected to increase by roughly 25% by 2040.

In my last article, "Harnessing Dividends From The Energy Sector In 2019," I discussed Exxon Mobil (XOM) as one of my four ideas. As a dividend aristocrat XOM is certainly a poster child for stability and dividend growth through good and bad times. Since XOM’s highs in 2014 of $104.25 per share XOM has not broken $90 since January of 2017. The overall energy story has many tailwinds that should lead to growth, increased dividends and overall appreciation for shareholders as we roll into the next decade. Over the past year XOM has traded between $89.30 and $72.16 while after the most recent pullback closed at $79.43. At these levels XOM is undervalued, which has pushed their dividend past the 4% yield mark. XOM has it all, including growth prospects, a strong balance sheet, reliable dividend income and 36 consecutive years of dividend growth, making them a dividend investor’s dream or a great idea of long-term investors.

A stellar balance sheet to start with

Exxon Mobil is the largest publicly traded integrated oil and gas company in the world. Having been in business for over 135 years their business segments, which include upstream, downstream and chemicals, generated $19.7 billion in earnings and $33.2 billion in cash flow from operations in 2017. Since oil's downward turn, XOM ended 2017 with its highest total equity level for the past five years of $194.5 billion as their liabilities shrunk to the lowest levels in five years of $152 billion and total assets came in at $348.7 billion. With only $24.4 billion in long-term debt I would classify XOM’s financials as world-class, allowing them to increase their capital expenditures whenever the opportunity arises. It's also very important that their equity has been increasing as their total assets have increased over the past three years while their total liabilities have decreased over the past four years.

(Source: Exxon Mobil Financial Information)

(Source: Exxon Mobil Financial Information)

XOM’s Global Operations and current growth

As the largest public oil and gas company XOM has built an international portfolio of high-quality projects with future opportunities for growth throughout their upstream, downstream and chemical businesses. XOM’s operations currently total approximately 4 million oil-equivalent barrels of net oil and gas production per day, 5.5 million barrels of petroleum product sales per day and 25.4 million tonnes of chemical prime product sales.

Exxon Mobil recently made their 10th discovery off Guyana and raised the overall resource estimate for the to 5 billion barrels of oil equivalent boe. This estimate was increased after further evaluation of their previous discoveries and their new discovery at the Pluma-1 well. It is estimated that by 2025 the Stabroek Block will have five floating storage, production and offloading vessels producing more than 750,000 bbl/day of oil. XOM is the operator and currently owns a 45% stake in this project. The first phase of development, which started last year, is anticipated to produce 120,000 BPD by early 2020. Phase two should produce 220,000 BPD and is anticipated to be up and running by the middle of 2022. XOM has estimated that the cost of supply is roughly $35 per barrel which makes this operation very profitable at current oil prices. There has been a mountain of success with the Guyana project and with 6.6 million acres of exploration within the region, XOM and their partners have the potential to add billions of additional low-cost oil and future phases of this project.

Through XOM’s diverse Upstream portfolio of opportunities they were able to add 9.8 billion barrels oil equivalent barrels to their resource base in 2017. This will be critical to their future growth plans of increasing their tight-oil production in the Permian, growing their business in Brazil and developing new Liquified Natural Gas projects. XOM is expecting that their production in the Permian will grow 5X the current levels to approximately 600 Koebd net by 2025. The most recent discoveries in the Guyana region should deliver 450 Koebd of production by 2025 as well. XOM is also anticipating starting up LNG projects in Mozambique and Pappa New Guinea, which could add more than 20 Mta of capacity by 2025. XOM has captured 53 million acres of exploration across 14 countries, which will drive future upstream projects.

Exxon Mobil’s Future Upstream Projects

(Source: Exxon Mobil Global Upstream Portfolio)

XOM’s downstream portfolio is one of the largest refiners and lubricant manufactures in the world with 22 refineries. XOM has seen a 130% increase in synthetic lubricants sales over the past decade and anticipates that the demand for transportation fuels will increase by nearly 30% by 2040. This will be driven by commercial transportation within developing countries as there is anticipation that the demand for diesel fuel is expected to grow by 30% as the worldwide gasoline demand levels off. XOM will also benefit as the lubricant business is expected to grow as demand is set to outpace industry growth significantly. XOM has entered Mexico and Indonesia with branded sales, which will drive profits to the bottom line.

Exxon Mobil’s Future Downstream Projects

(Source: Exxon Mobil Global Downstream Portfolio)

XOM’s chemical business is one of the largest in the world. The global chemical demand has doubled since 2000 which has outpaced the global energy demand. XOM anticipates that over the next two to three decades the demand will continue to increase by 4% on an annual basis. XOM currently had 6.8 million tonnes of performance product sales in 2017 and are planning on increasing production by 10 million tonnes per year by 2025 by bringing 13 new facilities online. This will aggressively grow sales of high-value performance products by approximately 50% by 2025.

A look into Exxon Mobil’s projected future

Every $1 invested in Exxon Mobil’s research portfolio will generate an expected value of $5+. XOM is planning on investing $50 billion in the United States over the next five years. Even in a low commodity price environment XOM is projecting that there will be substantial growth headed into the next decade. By 2025 XOM sees a potential increase in earnings of 35% with just a $40/bbl price, and at $60/bbl earnings could increase by 135%. This translates into potential cashflow increases of 50% at $40/bbl and 105% at $60/bbl by 2025. XOM’s upstream portfolio is projected to grow by 3X by 2025 by a fivefold increase in Permian tight-oil production and the 25 planned start-ups which will be adding net 1 MOEB per day. Their downstream portfolio could increase earnings by 2X by 2025 due to a 20% decrease in project costs via proprietary technology improvements, 20% margin improvement shift to higher-value products and capturing an integrated advantage in the Permian. The chemical segment could jump 2X by 2025 by growing capacity in North America and Asia by 40%, 13 new world-class facilities and performance products delivering 50% earnings growth.

(Source: Exxon Mobil 2018 Investor Information)

Exxon Mobil is a dividend seeker’s dream on a long-term investor's best friend

A quality dividend which is safe, growing and large is hard to come by. Currently If you were to invest in XOM the annualized payout is $3.28, making the effective yield of 4.13%. The dividend is supported by a 69.49% payout ratio leaving more than enough room for continued raises on top of the previous 36 years of consecutive dividend raises XOM has awarded shareholders. The five-year growth rate for XOM’s dividend is 7.02%. These figures make XOM a dividend dream for investors. For someone looking to park cash to generate income XOM can withstand market downturns with the best of them and has increased their dividend during each of the downturns throughout the past three decades. Every year you get a raise on your payout and with their track record you can build that annual raise into your personal projections. XOM’s dividend is a long-term investor’s dream because you’re getting paid over 4% to hold your investment until your desired sale price. If you purchased 100 shares and the price stayed the same for the year without compounding your investment would yield $328 and when reinvested would generate an additional 4.13 shares. I personally think the energy sector has major tailwinds behind them going into the next decade and that XOM is undervalued, which makes it a great investment for anyone.

(Source: Dividend.com)

The tailwinds that I believe will push the energy sector and XOM higher going into the next decade

I cannot stress enough that the demand is going to grow through 2040 for energy. By the year 2040 the global population is expected to grow by an additional 1.8 billion individuals to 9.2 billion people from the current level of 7.4 billion. By 2040 the global GDP is expected to double, and the per capita GDP is projected to increase significantly which will result in billions of people joining the middle class. As industrialization in developing countries and rising living standards for expanding populations worldwide occur, the dependence on reliable energy will increase. China’s GDP per capita is likely to triple to more than $40,000 by 2040 while India’s per capita is expected to triple but will be less than half of China’s level. Africa’s GDP per capita is expected to increase by 50% but will trail other emerging markets. The middle class will expand globally and is expected to grow by approximately 80% by 2030 to reach more than 5 billion people. This combination is expected to drive the global energy demand by roughly 25% by 2040. An additional 25% added to the global energy demand is equivalent to adding another North and Latin America to the current demand of energy.

(Source: Exxon Mobil Data Source: World Bank)

XOM is projecting positive growth in oil, gas, nuclear, solar and wind and other renewables such as hydropower through 2040 with a minimal decline in coal. From their projections renewables will still be a small percentage of the global energy mix in 2040. Oil will remain the dominant energy source while gas overtakes coal for the 2nd spot.

(Source: Exxon Mobil 2018 Energy Outlook)

As the demand for energy increases multiple sectors will consume more energy. The demand for electricity will surge. As the rising living standards and increased urbanization occur through 2040 electricity use is expected to increase by 70%. By 2040 global transportation-related energy demand is projected to increase by close to 30 percent as well. Electricity generation could become the largest and fastest growing demand sector for energy. This will be supported by a variety of energy types including natural gas, renewables, nuclear increasing their share. China and India are expected to contribute about 45% of the world energy demand growth.

(Source: Exxon Mobil Energy Demand Outlook)

India imported 21.02 million tons of crude in October 2018 which was a 10.5% increase from October 2017. India will be importing more crude oil and natural gas from the United States to expand bilateral trade. By 2022 India is looking to more than double the natural gas in their energy mix to 15%. India will build 11 Liquified Natural Gas terminals over the next seven years to help make this a reality.

China is currently the largest importer of natural gas on the global stage. China has imported 72.06 million metric tons of natural gas in the first ten months of 2018 which is an increase of 33.1% from the same period in 2017. The Chinese government is focusing on air quality and decreeing their dependence on coal by utilizing more natural gas. As this switch occurs in conjunction with a growing energy demand China will need to import more natural gas as their energy producers will not be able to fill the gap.

The risks of Exxon Mobil

Exxon Mobil faces unique risks to their business which goes well beyond competition from other integrated oil majors. XOM is largely dependent on commodity prices which are affected by politics, governmental policies and supply and demand numbers. Governments can increase production and add supply on the market which will drive commodity prices down. Their business is hard to predict and forecast because spot prices are made up of factors outside of their control. XOM also faces major repercussions if they have a catastrophe in the form of a major oil spill which can result in horrible publicity and large penalties and fines.

Energy policies can also harm XOM as governing bodies are moving toward clean renewable energy. There are movements in green initiatives such as the Green New Deal which is being championed by Rep- elect Alexandria Ocasio-Cortez out of New York. In her proposal the Green New Deal would set a goal of getting 100 percent of the nation’s electricity from renewable energy sources. That would mean wind, solar, biomass and geothermal would generate all of the energy passing through the electrical grid while fossil fuels in the form of coal, natural gas, oil and nuclear power are eliminated. Even though the Green New Deal is still in draft form if it happens to get passed and looks anything like it does now XOM could be in a world of trouble.

Conclusion

I love the energy sector and XOM is certainly best in breed. XOM is undervalued and should be trading north of $90 a share. I believe that by 2022 XOM could retest its all-time highs and break through $110 a share. The headlines and news are overshadowing the real story of how the global energy demand is increasing. The equation is simple, more people on the planet equals more energy which is needed. Look at the past three decades the global population, the global energy demand and the global GDP have continuously increased. Unless we have a catastrophic event which wipes out a portion of the population it is very unlikely for these trends to reverse. If we continued this upward trend with 4 billion people the chances are it continues with 7 billion then the 9 billion plus people living on this planet by 2040.

I also don’t believe anyone who is screaming for 100% renewable energy by a certain timeframe has actually sat down and researched the energy sector. Renewables have some major problems such as how much space they take up and the efficiency of power generation. With the global population increasing it will be increasingly hard to allocate space for solar farms and wind turbines. I think a more realistic approach is that renewables will play a role in the global energy mix but they will not account for 100% of its generation. It's 2018 and we still use combustible engines. Our best solution is an electric car that can only hold a charge for several hundred miles. I don't see a world where the utilization of natural gas and oil decreases by 2040. XOM is a strong buy at current levels.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in XOM over 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.