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The energy giant is a powerful profit-making machine—but BW's Gene Marcial says its shares remain undervalued
John D. Rockefeller, and the heirs to his Standard Oil fortune, would probably all agree on one maxim: Nothing succeeds like success. And so, no doubt, does the management at the company that is the direct descendent of the oil colossus: Exxon Mobil (XOM).
Success, in fact, is what greases the wheels of Exxon Mobil, the world's largest publicly owned integrated oil company. It has been piling up billions upon billions of dollars each year in eye-popping profits. Even some current-day members of the Rockefeller family couldn't budge the company (BusinessWeek.com, 5/28/08) off its chosen path when they tried to push the oil giant's focus toward alternative and renewable energy and split the role of chairman and chief executive officer. Rex Tillerson, current holder of both those titles, would have had to give up the chairmanship of the company's board.
Not So Ho-Hum
To be sure, Exxon Mobil's shareholders should be a happy bunch. The company racked up a record $40.6 billion in profits in 2007 on sales of $358.6 billion, on top of $39.5 billion in 2006 on sales of $335.1 billion, and $36.1 billion in 2005 on sales of $328.2 billion. Since Tillerson's elevation to chairman and CEO in January, 2006, the stock climbed from 55 a share to 96 on May 21, 2008, before easing to 85 on June 3. So it wasn't much of a surprise when shareholders backed management's strong stand against the Rockefeller proposals.
But the real story here is why Exxon Mobil, which is a mainstay in almost every institutional investor's portfolio, remains an attractive stock—and a must-own for long-term investors. True, a big oil tanker is hard to turn quickly when the waters get rough, and with Exxon Mobil's broad base of shareholder ownership —with a huge market cap of $467 billion—you can't expect to see the company's stock make sharp, spectacular upward moves. But it's the company's sheer size, and predictable profitability, that make it an attractive choice in a dicey market.
Even so, or maybe even because of those reasons, some analysts regard Exxon Mobil as a ho-hum stock. Of the 19 major Street analysts who follow it, 10 rate it a hold against nine who recommend it as a buy. But what's noteworthy is none rate it a sell.
So why buy the stock if you don't already own it, or why buy more when you already have shares? One basic reason: The giant oil company is still very much undervalued.
Oil Price Effect
Richard Helm, a senior vice-president and portfolio manager at Cohen & Steers Capital Management (CNS), says that for such a huge company with oodles of cash on its balance sheet (some $34 billion), Exxon Mobil is one of the cheapest energy plays. For one, the stock now trades at just 10 times 2008 estimated earnings of $9 a share. That is about in line with, or less than, its smaller peers. Helms figures that this year the stock could hit 102 a share. Exxon Mobil is one of the top 10 holdings in Cohen & Steers' portfolio.
There are many other reasons, he says, why he considers Exxon Mobil an attractive value. Per-share earnings, for one, have been on a fast track, rising from $1.69 in 2002 to $7.28 by 2007. And its stock has raced up from 30 a share in 2002 to 85 as of June 3, 2008. The company's return on equity has vaulted to 34.5% last year, from 26% in 2006. And dividend growth, a number that Helms pays attention to, is at a yearly clip of 9.1%, with the shares yielding 1.7%. Its fat cash hoard enabled Exxon Mobil to buy back about $8 billion of its stock in the first quarter of 2008.
True, much of its huge profits are currently driven by skyrocketing crude oil prices. But even if oil prices moderate, Exxon Mobil's awesome earnings aren't likely to crash, Helm argues.
Here are some numbers he believes are important to consider: In 2007, 83% of the company's total revenues came from its downstream, or refining, operations, which accounted for just 23.6% of net income. On the other hand, oil and gas production, or upstream, activities accounted for only 7.3% of revenues but generated a whopping 65% of profits, mainly due to the jump in oil prices. He argues, however, that even when the price of oil moderates, Exxon Mobil's refining operations could well produce increased earnings. As of 2007, it owned interests in 38 refineries worldwide.
Outperforms the S&P
As one of the world's largest oil and gas producers, Exxon Mobil owns the largest portfolio of proved reserves and production in North America, and is the largest producer of oil and gas in Europe.
One important issue for oil producers is the life of its reserves and how fast they can be replaced. Helms notes that compared with its peers, Exxon Mobil's reserves have a longer life, which he estimates at about 14 years, one of the highest in the industry. The company increased its capital expenditures to $25 billion in 2008, from $20 billion in 2007.
Exxon Mobil replaced its 2007 production by adding reserves from Europe, the Middle East, North America, and West Africa, according to Robert Mitkowski of Value Line (VALU). He considers Exxon Mobil's shares timely for purchase by conservative investors, because of the company's strong finances. Its commitment to increased research and development, he adds, means the company will probably participate, if not lead, in any major industry shifts, such as advanced fuel technology. "The company's position as a mainstay in the energy field appears assured for years to come," says Mitkowski.
With its size and dominance in the energy industry, not many investors realize that Exxon Mobil's stock has outperformed the Standard & Poor's 500-stock index in the past 19 years. That's an impressive score, and it's likely the oil behemoth could continue to outpace the stock market in the years ahead.