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Published: June 22, 2010
The oil industry is in the midst of dealing
with one of the largest spills in history. The consequences
could be dire for firms focused on offshore drilling, with a
current six-month moratorium on drilling in the United States
and a slew of new regulations and safety procedures being
prepared across the globe. Prospects for the entire industry
have also taken a hit.
Many investors are using the current calamity as an opportunity
to pick up shares of major industry players, even BP (NYSE:
BP) itself, on the cheap. However, firms directly affected
by the spill face uncertain political and business risk and
could remain dead money for many years to come. Another strategy
is to look at other leading energy firms that have traded down
because the market is painting too broad of a negative brush
stroke across the industry.
A firm down more than -10% since the spill is major integrated
energy giant Exxon Mobil (NYSE: XOM). Exxon Mobil
consists of a massive array of energy businesses, literally
hundreds of affiliate companies and geographic locations. It
also had its own major oil spill back in 1989 when the Exxon
Valdez ran aground in Alaska. It took more than a decade, but
the firm has learned from its mistakes and has grown into a
bellwether in the industry and places a high priority on
safety.
The three primary operating units at Exxon Mobil include
upstream segments that relate to the recovery and production of
crude oil and natural gas, which collectively account for about
10% of total sales. Downstream consists of refining and
distribution operations, which constitute the bulk of sales at
about 80%. The rest relates to petrochemical operations that go
into making plastics and similar specialty products.
In terms of investments, Exxon Mobil owns nearly 70% of
Imperial Oil (NYSE: IMO), the largest integrated oil firm in
Canada, and recently inked a deal to acquire XTO Energy
(NYSE: XTO) and its appealing natural gas assets, which is a
much cleaner form of energy compared to other fossil fuels.
Geographically, about 30% of sales stem from the United States.
Single digit percentages of sales stem from Japan, Canada, the
United Kingdom and Belgium, with the rest spread throughout the
world.
Looking at recent financial performance, 2009 was a down year as
lower crude and natural gas prices adversely impacted sales and
earnings. The current year should see a recovery to more
normalized levels where total sales should reach nearly $400
billion, with corresponding
net income of just under $30 billion, or close to $6 a
share.
Free cash flow should exceed $25 billion to reach nearly
$4.50 a share.
Exxon Mobil
generates billions
of dollars in
cash flow
annually and has an
excellent track
record of deploying
its capital. Mergers
and acquisitions
activity is a
cornerstone of its
growth approach.
Last year, the
company repurchased
$19 billion of its
own stock, which
qualifies as an off
year -- it had
acquired more than
$30 billion in each
of the two previous
years. Annual cash
dividends amount to
$8 billion in annual
payments to
shareholders for a
dividend yield
close to 3% based on
recent prices.
Shares of Exxon
Mobil currently
trade at a low
double digit
multiple of earnings
and cash flow. This
implies that the
market doesn't
expect profits to
grow very rapidly
going forward. I
estimate that annual
growth expectations
are less than +6%,
which is less than
half the growth
Exxon Mobil has
posted on average
during the past
decade.
Action to Take
--->
Near-term prospects
at Exxon Mobil have
been dented by the
oil spill in the
Gulf of Mexico, but
has become an even
more compelling
investment play in
the longer term. The
stock was already
undervalued but will
benefit from higher
oil prices, as well
as the potential
demise of archrival
BP.
Annual profit growth
in the double digits
during the coming
decade could be
challenging, but if
Exxon Mobil can
manage to grow +10%
during the next five
years, then the
stock could be
undervalued by at
least -30%. This
isn't an overly high
hurdle given oil and
natural gas prices
are arguably
depressed along with
global economic
activity.
Further down the
road, the long-term
demand outlook
continues to burn
bright. Exxon Mobil
estimates that oil
will still represent
35% of the global
energy supply by
2030 and that
natural gas will
experience the
fastest growing
demand out of all
fossil fuels during
this timeframe.
-- David Sterman
Staff Writer
StreetAuthority |
