Seeking Alpha

2 Reasons 5% Yielding Exxon Mobil Could Be One Of The Best Investments Of 2020

|
About: Exxon Mobil Corporation (XOM)
by: Brad Thomas
Brad Thomas
Dividend growth investing, REITs, newsletter provider, value
Summary

Exxon Mobil's yield is near the highest it has been in three decades.

Over the long term, 5% to 10% CAGR EBITDA growth could drive 9% to 17% CAGR total returns that could double or triple what investors in the S&P 500 enjoy.

Exxon Mobil is about 27% undervalued, making it a very strong buy.

This article was coproduced with Dividend Sensei and edited by Brad Thomas.

Note: As many of you know, I frequently write on REITs, but the purpose for this article is to provide readers with other dividend-paying alternatives and also to provide some of my recent investments. My goal is to provide readers with 2-4 articles per month that are non-REIT and that are actionable investments.

In a research paper, Bank of America recently highlighted one of their favorite sector recommendations of this year. Here's what BAC wrote on Dec. 2, 2019.

XOM is our top US oil major pick for 2020

In recent weeks we had the opportunity for multiple meetings with Exxon Mobil (XOM) management, including SVP Andy Swiger, XOM’s country team in Guyana and a week on the road in Europe with Investor Relations. Our takeaway is that XOM’s strategy of counter-cyclical investment through the cycle is approaching an inflection that we think should address market skepticism on whether it can translate to meaningful outperformance vs peers.

Media reports that XOM may be accelerating asset sales align with our view that non-core disposals could exceed Street expectations and also underlines our view for upside risks to its target to double cash flow by 2025 and which our analysis suggests could support our PO of $100/sh. Ahead of 2020, XOM is our top US major oil pick. Reiterate Buy." - Bank of America (emphasis added)

We understand why BAC is bullish on oil for 2020.

(Source: SL Advisors)

Energy is trading at the biggest discount to the broader market in a decade.

(Source: Brian Gilmartin)

And while analyst EPS growth forecasts must always be taken with a healthy grain of salt, especially for cyclical industries, the fact is that the energy sector is expected to post the strongest earnings growth this year.

Decade low valuations + strong earnings growth = huge upside potential for this year, which brings me to Exxon Mobil, BAC's top pick for oil majors.

Exxon Mobil's yield is near the highest its' been in three decades.

(Source: Ycharts)

In fact, Exxon has only ever offered a 4% or higher yield 7.8% of the time in the past 25 years.

(Source: YieldChart)

A 5% yield is an even rarer occurrence. This means it's the best time in 30 years to buy this 10/11 quality SWAN dividend aristocrat, at least for anyone interested in owning this kind of company.

So let's take a look at two reasons why I think BAC is right that Exxon Mobil could be poised for a great 2020 and beyond. A return to fair value this year could result in 27% total returns and over the next five years, 9% to 17% CAGR total returns are a realistic forecast.

Reason 1: A Great Long-Term Growth Strategy Headed By The Best Management Team In The Industry

The first reason to be bullish on Exxon Mobil is the most aggressive growth initiative of any large oil company.

(Source: investor presentation)

Exxon Mobil plans to ramp up annual spending on growth to as much as $30 billion, $10 to $15 billion more than most of its peers.

(Source: investor presentation)

That spending is designed to increase oil production by 2.5 million bpd and 1 million bpd on a net basis, representing 25% production growth over the next six years.

(Source: investor presentation)

Management is being extremely disciplined with what it's investing in, targeting 15% to 20% returns on capital.

What if oil prices crater? Even at $40 Brent (global oil standard), Exxon Mobil estimates that it would earn at least 10% returns on capital for all its growth projects.

(Source: investor presentation)

Breakeven prices that include 10% returns on capital are $35 in the Permian (production costs $20 by 2023 per management guidance) and $40 in Brazilian offshore. At $60 oil, which is below today's levels, returns on capital in Guyana are nearly 40% and about 30% in Brazil.

(Source: Bank of America)

Speaking of Guyana, that highest ROCE growth avenue is expected to become self funding by 2021 and by 2025 BAC estimates will be throwing off $5.4 billion in FCF for XOM, nearly 20% of the company's total.

Guyana is much like Permian shale in that it continues to beat expectations. On Dec. 21 XOM announced it had started production at the Liza field offshore Guyana ahead of schedule. Lisa 1 was originally expected to begin production in late 2020.

By 2025 750,000 bpd are expected to be flowing from Guyana and BAC expects that in March's investor update that forecast will be hiked to 1 million bpd. Why? Because just two days after announcing Guya production was starting up, Exxon Mobil announced yet another big Guya offshore discovery.

It made an oil discovery offshore Guyana at the Mako-1 well southeast of the Liza field, marking the 15th discovery on the Stabroek Block. The discovery adds to the previously announced estimated recoverable resource of more than 6 billion oil-equivalent barrels on the Stabroek Block." - Exxon Mobil press release

Then there's the Permian where Exxon owns 20,000 wells and is expecting to hit 1 million bpd of production by 2024.

(Source: earnings presentation)

Exxon Mobil estimates that production costs per barrel will hit $20 by 2023 and combined with Guya, BAC estimates that $19 billion in annual operating cash flow will be coming from these two big growth catalysts.

Together, Exxon Mobil’s projections for the Permian and our estimates for Guyana would amount to ~$19bn of cash flow by 2025 from ~$3bn in 2019. Put another way, these two projects could account for a 50% increase in cash flow in 2025 from $32bn in 2019. With all other things equal, we believe successful execution on both projects could underpin market confidence in Exxon’s targets to double cash flow by 2025." - Bank of America

By 2025 assuming $60 crude, Exxon Mobil expects that its return on capital employed (industry version of ROIC) will double from 2017 levels.

(Source: investor presentation)

By 2025 Exxon Mobil estimates it will double its free cash flow if Brent averages $60 ($66 now) and grow FCF by 150% if it hits $80.

(Source: investor presentation)

During the next six years, Exxon Mobil expects to generate $190 billion in free cash flow, retaining $100 billion of that after dividends (53% FCF payout ratio) to fund debt repayment, buybacks, and acquisitions.

But a plan isn't worth much if management is incompetent. Fortunately, Exxon has the best management quality in the industry. Here's Morningstar's Allen Good explaining his firm's "exemplary" rating on XOM's management.

We have long argued, and the historical returns support our contention, that Exxon is the highest-quality integrated overall (operating and assets) and that its downstream and chemicals segments are key differentiators. It stands to reason it should invest to maximize those advantages. However, integrated oils have a spotty record of delivering on long-dated volume and return targets. Execution risk is thus high.

That said, Exxon is one of the better operators and developers in the world, and its plan includes a high portion of operated projects, increasing the chances for success, in our view. Also, while oil prices are likely to be volatile during the next seven years, it can cover its spending requirements and dividends at $40/barrel, ensuring their safety." - Morningstar

We (and Morningstar's Allen Good) are far from the only ones who consider Exxon Mobil's management best in breed when it comes to capital allocation.

In our view, momentum is building behind the key drivers of its plan to double cash flow through 2025. Almost two years in, the inflection in Permian production is well underway while first oil from Guyana confirmed for December kick starts what we expect to be 7-8 years of growth with gross operated production we believe can significantly exceed the 750,000 bopd expected in 2025.

We expect the 2025 target of at least 1mm bopd to be confirmed at the upcoming analyst day in March. We see XOM increasingly differentiated by successful project execution that takes on renewed significance given cost overruns at competitor projects – and a 2025 strategy anchored on five major developments, all operated by XOM." - Bank of America

Since 2013 Exxon Mobil has started 30 growth projects that are expected to generate superior cash margins relative to the legacy assets whose production they will be replacing.

(Source: Bank of America)

Bank of America expects Exxon Mobil's growth initiatives to start paying off handsomely with 54% and 90% growth in free cash flow in 2020 and 2021, respectively.

(Source: Bank of America)

By 2025 BAC is expecting Exxon Mobil to be generating $46.2 billion in annual free cash flow compared to $14.4 billion in current annual dividend spending.

(Source: Bank of America)

BAC expects Exxon Mobil to grow the dividend 7% CAGR over time and begin covering it with free cash flow this year. This bullish model also supports BAC's fair value estimate of $101 which is similar to my model's $96 2020 fair value estimate (see section two).

(Source: Bank of America)

BAC estimates that Exxon Mobil's net debt/capital will fall to 4% by 2025 and its dividend payout ratio will steadily improve after a one time hit in 2020.

That's roughly in line with what FactSet is reporting as well.

Year

Consensus FCF/Share

Forecast FCF Payout Ratio

2019

$3.85

84%

2020

$1.91

187%

2021

$2.73

136%

2022

$3.71

106%

(Source: FactSet Research, F.A.S.T Graphs)

The 24 analysts that cover Exxon Mobil don't expect it's going to cover its dividend with free cash flow while it's investing $25 to $30 billion per year in growth until those projects start coming online.

To fund its growth plans Exxon Mobil has announced plans for $15 billion in asset sales by 2021. Bank of America, after talking with management, believes total asset sales will hit $25 billion.

Asset sales plus the strongest balance sheet in the industry is howExxon Mobil can embark on its epic growth quest without putting the dividend in danger.

(Source: investor presentation)

XOM's debt/capital is 12% and 30% or less is considered safe in this industry. It has the strongest credit rating in the industry precisely because management is so conservative with debt, which has allowed the dividend to safely grow for 37 consecutive years no matter what oil prices were doing.

S&P rates XOM AA+ and Moody's is even more enthusiastic about the balance sheet. Here's what Moody's said on Dec. 6 when it last reviewed its balance sheet.

Exxon Mobil Corporation's (Exxon Mobil) Aaa rating reflects its large asset base, global diversification and leading position within the global oil and gas industry. The company is diversified across the hydrocarbon value chain and benefits from integrated operations in upstream, midstream, liquified natural gas and downstream refining, and chemicals. Exxon Mobil has very large proved reserves scale, refining capacity and is among the largest chemical producers in the world. The company maintains low financial leverage as measured against book capitalization and proved reserves and relative to its peer group." - Moody's

Now it's true that Moody's Aaa rating placed a negative outlook on XOM in November, which I'll discuss in detail in the risk section.

But even if Moody's did downgrade XOM it would then merely be equivalent to S&P's AA+ rating. As things stand now Moody's considers XOM the equivalent of JNJ and MSFT, the only two companies with an S&P AAA rating, which is higher than that enjoyed by the US treasury.

(Source: Wikipedia)

That might explain why XOM enjoys 2% effective borrowing costs compared to 2.5% for the US government in December 2019.

(Source: investor presentation)

Exxon Mobil's growth plans could still be funded safely if oil were to fall to a 10 year low of $30. At $55 crude, the lowest gas prices in years, and low refiner/chemical margins that are temporary, Exxon Mobil could still fund the growth initiative without surpassing 25% debt/capital.

And 25% is merely what very low commodity prices would induce through 2023 after which leverage would begin falling again. Exxon Mobil estimates that $40 or higher global oil prices (currently $66) would keep the dividend safe, growing and still allow it to execute on its multi-year growth program.

What does Exxon Mobil's growth plan mean for its valuation? Bank of America's model, which pegs fair value at $101, estimates that strong growth in cash flow and earnings will result in Exxon Mobil's EV/EBITDA ratio falling to 5.0 by 2021 if the price were to remain flat during this time.

(Source: Bank of America)

For context, Exxon Mobil's 20-year average EV/EBITDA is 8.3, implying that for the stock to remain stagnant the company would have to become 40% undervalued.

We should point out that FactSet's consensus EBTIDA estimates show slightly slower growth than what BAC is modeling.

Year

Consensus EV/EBITDA Ratio

Historical Discount To Fair Value

2019

7.6

8%

2020

6.8

18%

2021

6.6

20%

2022

5.8

30%

(Source: F.A.S.T. Graphs, FactSet Research)

Of course, EV/EBITDA is just one metric among many that investors should look at.

So let me show you why Exxon Mobil is trading at one of the highest margins of safety of any dividend aristocrat, and thus has the potential to deliver 9% to 17% CAGR total returns over the next five years, and about 17% CAGR returns over the next three.

Reason 2: 27% Discount To Fair Value Means 9% to 17% CAGR Long-Term Total Return Potential And 27% Upside Potential In 2020

  • Yield: 5.0%

  • Dividend Growth Streak: 37 years (aristocrat)

  • 5-year CAGR dividend growth: 5%

  • Forward P/EBITDA: 6.8

  • PEG ratio: 0.85 (using FactSet long-term growth consensus)

Exxon Mobil is offering a tantalizing value proposition, not just due to the very safe 5% yield, but its low forward EBITDA ratio and a PEG of under 1. For context, the S&P 500's EPG ratio is 3.1 meaning Exxon is offering growth at a wonderful price.

What kind of growth are analysts expecting from Exxon Mobil?

XOM Growth Matrix

Metric

2020 Growth Consensus

2021 Growth Consensus

2022 Growth Consensus

Dividend

6%

7%

5%

Operating Cash Flow

-6%

14%

6%

EBIT (pre-tax profit)

11%

6%

6%

EBITDA

11%

4%

13%

(Source: F.A.S.T Graphs, FactSet Research)

The S&P 500's historical EPS/cash flow growth rate is 5% to 7%, and 3% to 8% is expected in 2020. Exxon Mobil is likely to grow about twice as fast and then continue growing steadily beyond that, even with about $60 oil price consensus expectations.

Here's what that growth means for Exxon Mobil whose fair value based on 2019 consensus fundamentals was $91.

XOM Valuation Matrix

Metric

Historical Fair Value

2020

2021

2022

5-Year Average Yield

3.78%

$92

$98

$104

13-Year Median Yield

2.80%

$124

$133

$140

25-Year Average Yield

2.72%

$128

$137

$144

Operating Cash Flow

10.8

$85

$97

$103

EBITDA

8.3

$86

$89

$100

EBIT

12.5

$70

$73

$78

EV/EBITDA

8.3

$86

$89

$100

Average

$96

$102

$110

(Source: F.A.S.T Graphs, FactSet Research, Reuters', Gurufocus, YieldChart)

The range of fair value estimates is $70 to $128 but the average of $96 is what we consider a reasonable estimate of this year's fair value based on expected fundamentals.

Bank of America's discounted cash flow model derived fair value is $101 for this year, similar to what our model estimates.

Classification

Margin Of Safety For 10/11 Quality SWANs

2020 Price

Reasonable Buy

0%

$96

Good Buy

5%

$91

Strong Buy

15%

$82

Very Strong Buy

25%

$72

Current Price

27%

$70

Exxon Mobil is about 27% undervalued making it a very strong buy. What does a very strong buy mean? Likely market beating long-term returns, especially given the 2% to 7% CAGR long-term returns most asset managers expect from the S&P 500.

The Gordon Dividend Growth Model, which says long-term total returns are equal to yield + growth + valuations returning to historical norms, is what Brookfield Asset Management (BAM), Vanguard founder Jack Bogle, and each of the Dividend Kings have used for years or decades.

(Source: Ploutos)

That model has been relatively accurate at forecasting five-year-plus total returns with a 20% margin of error, meaning 10% forecast returns are 8% to 12%. The Gordon Dividend Growth model expects 4% to 7% CAGR total returns from the S&P 500 over the next five years, with 6% being the base case, half of what investors saw over the last decade.

Here' how I model Exxon Mobil's realistic total return range.

  • FactSet long-term growth consensus: 8.0% CAGR

  • Reuters 5-Year growth consensus: 2.2% CAGR

  • Ycharts long-term growth consensus: 6.5% CAGR

  • Management guidance: about 12% CAGR through 2025 (assuming $60 oil)

  • Historical growth rate: 3.6% CAGR over the last 20 years, rolling growth rates -7% to 39% CAGR

  • Realistic growth range: 5% to 10% CAGR

  • Historical fair value: 8 to 9 times EBITDA

There's naturally a lot of uncertainty surrounding growth rates for cyclical commodity producers but most analysts expect about $60 long-term global oil prices, which is also what Exxon Mobil models.

(Source: F.A.S.T Graphs, FactSet Research)

If it grows at the lower end of my growth range, then 5% growth and a return to the lower end of its historical EBITDA range would deliver close to 10% CAGR total returns over the next five years. That's significantly better than what investors can likely expect from the broader market, which is offering a paltry 1.8% yield.

(Source: F.A.S.T Graphs, FactSet Research)

If Exxon Mobil grows at the upper end of expectations and returns to the upper end of historical fair value, then it could deliver close to 17% CAGR total returns, about three times what the S&P 500 is likely to generate.

Keep in mind that management guidance is for 12% CAGR growth over the next six years. Thus my bullish forecast is potentially conservative, with 19% to 20% CAGR being achievable if Exxon Mobil delivers fully on its cash flow growth forecast.

9.3% CAGR growth is expected from 2019 to 2022, according to FactSet, which means a consensus medium-term total return forecast of 17% CAGR over the next three years.

(Source: F.A.S.T Graphs, FactSet Research)

The higher consensus return forecast is due to the shorter time period in which we always assume a company returns to its historical fair value multiple, assuming similar growth rates and fundamental conditions.

Year XOM Returns To Fair Value

Analyst Consensus Total Return Forecast

2020

27% CAGR

2021

17% CAGR

2022

17% CAGR

(Source: F.A.S.T Graphs, FactSet Research)

If Exxon Mobil were to return to fair value sooner, say by the end of 2020 due to oil prices rising faster and higher than most people expect, it could deliver 27% total returns this year. That's in a year when most analysts are expecting about 4% returns from the broader stock market.

Of course, all models are based on a company achieving its expected growth rates, and before you run out and buy Exxon Mobil first you need to be comfortable with its risk profile.

Risks To Consider

We alluded to Moody's negative outlook on XOM's debt earlier and while it chose not to downgrade the company from Aaa, it did bring up several things investors need to keep in mind.

Moody's forecasts that Exxon Mobil's negative free cash flow will be around $7 billion in 2019 and $9 billion in 2020. These forecasts reflect a Brent oil price assumption of $60 per barrel and some earnings growth in downstream and chemicals in 2020 but margins that remain cyclically weak, particularly in chemicals. Negative free cash flow is likely to continue in 2021, with the company's debt levels rising materially even if the company achieves it targeted asset sales of $15 billion over the period. The company's high level of growth capital investments cannot be funded with operating cash flow and asset sales at projected levels given Exxon Mobil's substantial dividend payout, absent meaningfully higher commodity prices and earnings from downstream and chemicals...

The negative outlook incorporates Moody's expectation for weakening credit metrics that could result in a downgrade in 2020. The negative outlook also reflects the emerging threat to oil and gas companies' profitability and cash flow from growing efforts by many nations to mitigate the impacts of climate change through tax and regulatory policies that are intended to shift global demand towards other sources of energy or conservation. Failure to achieve reserve replacement, production volumes or downstream and chemicals earnings capacity growth in line with the company's guidance could also result in a rating downgrade, as could large debt funded acquisitions or share repurchases. " - Moody's (emphasis added)

So if Exxon Mobil's FCF is expected to be negative through 2021 in Moody's model, why did it decide to reaffirm XOM's Aaa rating?

The affirmation of Exxon Mobil's Aaa rating reflects management credibility and track record on growth project execution. The company's Permian production volumes are rising in line with its guidance and the Guyana development looks to start initial production this December, with both assets continuing to grow production through 2025. The company is also expanding its LNG business, chemicals production capacity and is making targeted expansions in refining and marketing. Exxon Mobil benefits from its differentially large proved reserves base, integrated operations that provide countercyclical cash flow benefits and still low financial leverage as measured against proved reserves and book capitalization measures.

The company's proved reserves are much larger than its Aa-rated integrated peers, while it is also one of the world's largest petroleum refiners and petrochemical producers. This scale allows the company to align its cost structure with commodity prices and capture value across its integrated value chain.

Environmental considerations incorporated into our credit analysis for Exxon Mobil are primarily related to potential carbon dioxide regulations, but also include natural and man-made hazards. Social risks are primarily related to demographic and societal trends and responsible production. These risks could influence regional moves towards less carbon-intensive sources of energy, which could reduce demand for oil, gas and refined products. ExxonMobil is exposed to rising litigation risk, which is an event risk related to climate change and related disclosures. Future laws and regulations that could accelerate the pace of energy transition or changes in technology that affect demand for hydrocarbons represent a material and growing risk for the company. These risks also add to corporate governance considerations with respect to financial strategy and risk management. A strong financial position and low financial leverage are important characteristics for managing these environmental and social risks." - Moody's emphasis added

It's important to note that the same regulatory risks that Exxon Mobil and all energy companies face already is baked into Moody's Aaa rating.

(Source: investor presentation, EIA)

According to the US Energy Information agency, global oil demand will continue to grow at a slowing rate through 2040. Now it's true that all models are probabilistic in nature and global oil demand forecasts vary widely depending on the source.

(Source: BP)

The most bearish forecast is from the International Energy Agency, under the scenario where the world fully achieves the Paris climate accord goals. Thus far no major nation has even made significant promises toward that effect but it could result in 50 million bpd lower global demand if it happened.

Fortunately for Exxon and all US energy companies, even a 3% annual decline in oil production from legacy fields (it's closer to 6% in reality) would still mean that production would be more than 30 million bpd less than demand under that most bearish IEA forecast.

According to the EIA, 80% of new capex spending by oil majors through 2040 (totaling over $4 trillion) is required just to replace falling production which is a natural part of this industry.

This is why we, Morningstar and BAC are bullish on Exxon Mobil's plan to invest up to $226 billion into new production growth through 2025. Other oil companies are focusing on spending less and buying back stock more. But ultimately Exxon Mobil's focus on high margin growth projects could put it in the driver's seat when it comes to generating safe and growing dividends for years and probably decades to come.

What about the threat of climate change litigation that Moody's mentioned in its negative outlook decision?

Here's NPR explaining how Exxon recently won (on Dec. 10) the NY climate case brought against it by the New York Attorney General's Office. That case hinged on claims that Exxon knew about climate change risks and defrauded shareholders by lying about it for decades.

A judge has handed Exxon Mobil a victory in only the second climate change lawsuit to reach trial in the United States... Justice Barry Ostrager of the New York State Supreme Court said that the attorney general failed to prove that the oil giant broke the law.

"Nothing in this opinion is intended to absolve Exxon Mobil from responsibility for contributing to climate change through the emission of greenhouse gases in the production of its fossil fuel products," Ostranger wrote. But, he added, "this is a securities fraud case, not a climate change case."

Ostrager concluded that James' office "failed to prove by a preponderance of the evidence that ExxonMobil made any material misrepresentations that 'would have been viewed by a reasonable investor as having significantly altered the "total mix" of information made available." - NPR

Note that Judge Ostrager didn't completely clear Exxon Mobil of its future climate change litigation risks either. He merely asserted that there was insufficient evidence for fraud and thus Exxon Mobil is likely to remain one of the climate change advocates' largest targets for the foreseeable future.

Other than the potential for Exxon Mobil's debt to climb much higher than expected if oil prices fall too low for long enough, there's also the executional risk inherent in so many global growth projects.

Exxon Mobil has a great track record on execution, operates most of its current growth projects (lowering risk), and is led by CEO Darren Woods, a 27-year company veteran.

But even the most proven dividend-friendly, conservative corporate culture can't save Exxon from the occasional misstep in execution.

There's also one final fundamental risk to consider before investing. That pertains to future dividend growth. While XOM is forecasting about 53% FCF payout ratio through 2025, assuming $60 oil, that doesn't mean that investors can necessarily expect the company to always deliver its 5% to 7% historical dividend growth rate.

After all, Exxon Mobil has been around since 1870 and likely plans to stick around for many more decades. That will mean it must eventually diversify its business into alternative energy, which is going to require a lot of retained cash flow.

In other words, while Exxon Mobil's dividend is likely to grow at 6% (per FactSet) or 7% (BAC's forecast) through 2025, beyond that growth might have to slow down in order for XOM to maintain its dividend aristocrat status long enough to become a dividend king in 2034.

We don't necessarily expect Exxon Mobil to begin AT&T (T)-like 2% token increases anytime soon. But by 2030 3% to 4% growth might become a frequent occurrence and 1% to 2% growth might become necessary in 2040 as Exxon Mobil has to crank up M&A and capex spending on non-oil and gas businesses.

Remember that Exxon Mobil will need to sustain its dividend during that transitional period. This means that even if oil prices were to hit $80 or higher, and FCF was to grow by over 150% by 2025, Exxon Mobil's dividend growth might have to be far more conservative than some bullish investors currently expect.

Bottom Line: Exxon Mobil's Super Low Valuation And Strong Growth In 2020 And Beyond Makes It One Of The Best High-Yield Aristocrats You Can Buy For This Year

Exxon Mobil isn't necessarily for everyone, none of our recommendations are. Some people just aren't comfortable with the cyclical nature of commodity prices and Exxon Mobil's volatile cash flows. Others might avoid oil producers for social/moral reasons.

But if you are OK with the business model and the risk profile, then 10/11 quality SWAN aristocrat Exxon Mobil is the best-integrated oil major you can buy for 2020 and likely far beyond.

It's 27% discount to fair value right now, right before growth is expected to accelerate rapidly, is the best time in 30 years (at least yield wise) to add this company to a diversified and risk-managed portfolio.

These are the risk management guidelines we use in managing our portfolios.

With the entire energy sector trading at the best valuation in a decade, and earnings growth expected to lead the S&P 500 in 2020, even if oil prices simply hold stable at current levels, Exxon Mobil has some of the best return potential in 2020.

A return to fair value this year, if it happened, would mean a 27% return in a year when the broader market is likely to see 3% to 5% total returns. More importantly, over the long-term 5% to 10% CAGR EBITDA growth could drive 9% to 17% CAGR total returns that could double or triple what investors in the S&P 500 enjoy. All while you collect a very safe and steadily growing 5% yield that's 2.5 times greater than what the broader market is offering.

Photo Source

Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.

Disclosure: I am/we are long XOM. 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.