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Published: September 29, 2010
Exxon Mobil
(NYSE: XOM) is the greatest oil company on the planet.
It makes more money per barrel of oil produced than any of its
peers. It has more than 61 million net undeveloped acres and a
total resource base of 72 billion oil-equivalent barrels. That's
a fancy way of saying Exxon has the largest exploration
portfolio in the world.
It's one of the most profitable corporations in the S&P 500. And
after a recent acquisition (more about this in a minute), it's
also the largest natural gas company.
All these statements are true. But the same was true when the
stock traded at $95 in 2008. Today, shares have fallen to $62.
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Over the past 10 months, Exxon has underperformed its peers
by about 18%. Most of the weakness can be attributed to its $41
billion takeover of natural gas producer XTO Energy. As you can
see from the chart, the stock has been trading sharply lower
since the announcement.
At a -35% discount off its 2008 highs, many analysts believe the
oil giant is a strong buy, including my colleague Dan Ferris,
editor of the Extreme Value newsletter. I have a lot of
respect for Dan, he's a great analyst. But I have to disagree
with him here...
Based on fundamentals, Exxon is not cheap. In fact, I think most
of its competitors are much better buys at current levels.
Here's why...
It's no secret shareholders are upset about Exxon's recent
takeover of XTO energy. All you have to do is look at its recent
share-price decline. Bullish investors are quick to point out
that Exxon has a long-term focus when acquiring companies. But
from my view -- short or long term -- this deal looks terrible.
You see, new technologies, like hydraulic
fracturing and horizontal drilling, have allowed natural gas
companies to extract huge amounts of gas from areas like the
Marcellus Shale in the Appalachian Basin and Barnett Shale in
Texas. According to the American Petroleum Institute, these new
technologies have created a 100-plus-year supply of natural gas.
It's no wonder natural gas prices are down -70% from 2008 highs.
Last week, Deutsche Bank published a report stating the natural
gas glut is likely to last at least another four years. That's
probably why three different analysts downgraded Exxon over the
past two weeks. Also, nearly every analyst covering the stock
(13, according to Thomson Reuters) has lowered earnings
estimates over the past few months.
Exxon is expected to earn $6.34 a share in 2011. Based on its
now-enormous natural gas exposure, I think these estimates have
to come down by at least -10%. If they do, it means Exxon is
trading at 11 times forward earnings -- making it more expensive
than most of its competitors.
Sure, Exxon could buy back its stock to increase earnings per
share. It's been buying up shares nearly every quarter since I
can remember -- including $8 billion worth when the stock traded
at an all-time high in early 2008.
But I still don't think it will be enough to make up for low
natural gas prices. Also, huge buybacks may be more difficult
given that the company has a net debt position for the first
time since 2002 -- after taking on $11 billion in debt from XTO.
I am not suggesting you short Exxon at these levels. It has over
$13 billion in cash, huge oil reserves, and the connections it
needs to acquire even more.
The better play is to buy either Chevron (NYSE: CVX) or
ConocoPhillips (NYSE: COP). These companies are trading
at just eight times 2011 earnings. Both are growing earnings at
a faster pace than Exxon. They also offer higher yields.
I expect Chevron and Conoco to outperform Exxon at least over
the next 18 months.
--Frank Curzio
Editor
Penny Stock Specialist
Note: This article originally appeared on
Growth Stock Wire |
