Buy This Oil Stock Now While The Price Is Low

| About: Exxon Mobil (XOM)
This article is now exclusive for PRO subscribers.

By Renee O'Farrell

When Exxon Mobil (NYSE:XOM) announced its first quarter performance on April 26, it fell short of analyst estimates. It reported earnings of just $2 a share versus expectations of $2.09 a share. The announcement came before the bell. Exxon stock went from almost $87 at the close of trading on April 25 to just $85.28 when the bell opened on April 26 - a difference of roughly 2%.

The question is does Exxon deserve it and I say no. I think it is the market overreacting and that Exxon is at a great price to buy right now. Consensus estimates put the company at earning $8.43 a share this year and $9 a share next year. At this rate, Exxon is priced at just 9.48 times its forward earnings, versus an average of 11.22 for its peers, but at a premium to its larger competitors, like Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP) and BP Plc (NYSE:BP). Then, there is the fact that, compared to its peers, Exxon pays a lower dividend yield - Chevron is paying 3.10% right now, while ConocoPhillips is paying 3.70%, and BP Plc is paying 4.60%.

But, I have another reason for being bullish about Exxon - gas prices.

Sure, natural gas is low right now and Exxon has a much larger exposure to natural gas than its peers do, but I caution investors to keep in mind - that is intentional. Exxon is the largest natural gas producer in the US and it plans to retain that title. In spite of historic lows in natural gas pricing, Exxon recently announced plans to ramp up its natural gas production - and this isn't small potatoes. The company is planning to invest $37 billion in natural gas production annually for at least the next several years.

Given that previously Exxon's capital expenditure in recent years ranged from $33 billion to $37 billion, investors can see Exxon is developing its production at as great a level as ever before, rather than turning all its investment toward higher margin crude oil the way that rivals like ConocoPhillips are cutting back on natural gas production and putting that money toward crude. The company is also investing in new land. Exxon recently spent $590 million on a large acreage in Oklahoma. It bought the parcel from Chesapeake Energy (NYSE:CHK).

Aside from internal investment, Exxon also has a number of deals in place that promise to be lucrative. The company has a deal in place with Canacol Energy that will allow it to develop shale oil exploration in Columbia as well as an agreement with Iraq's autonomous Kurdish region to explore there. Exxon is also developing deposits in Argentina though a joint arrangement with YPF SA (NYSE:YPF). The company also has an agreement with ConocoPhillips, BP and TransCanada (NYSE:TRP) to commercialize natural gas in Alaska's North Slope.

The thing is that for as high as crude oil has gone, natural gas is starting to pick things back up. When the tides reverse, Exxon will already be in a position to cash in - its rivals, not so much. Hedge fund interest is already brewing, with funds such as Whitebox Advisors, Jabre Capital Partners and Highbridge Capital Management initiating call positions in the company during the fourth quarter. Other hedge funds with call positions in Exxon include Citadel Investment Group, Millennium Management and D E Shaw. A number of hedge funds also initiated new positions in the company during the fourth quarter, including Chilton Investment Company and Gotham Asset Management.

All signs point to Exxon's share price rising - as soon as natural gas starts to gain significantly, that is.

Disclosure: I am long COP, CHK.