Evaluating Exxon Mobil – A Low-Risk, Below-Value Investment
August 24, 2010
As the market continues to drop, after two weeks of declines, many investors are looking toward conservative investments that are perceived as under-valued. Although many are leery of the oil industry, a position reinforced by a recent lowering of gas prices, it can be argued to still consider investment in Exxon-Mobil.
In comparison with the five other largest oil companies in the world – British Petroleum, Chevron Texaco, Total, Conoco Phillips, and Royal Dutch Shell – Exxon Mobil has consistently created the most revenue.
Exxon Mobil recently reported a net income of $7.56 billion, and a 24% increase in total revenue to $92.5 billion compared to the same time last year.
However, Exxon Mobil’s stock has recently dropped as a result of falling oil prices and the estimated lower future demand for crude oil, as well as the repercussions to the oil industry following BP’s Gulf of Mexico oil spill.
Exxon Mobil currently has a forward to Price to Earnings (PE) ratio of 8.8, and a Price/Earnings to Growth (PEG) ratio of .67, both indicators that the company’s stock is undervalued. ExxonMobil shares also produce a 2.9% 0.44 quarterly dividend.
The stock now trades with a forward P/E of 8.8 with a PEG ratio of 0.67. In additional to those signals of undervalue, it also yields a 2.9% 0.44 quarterly dividend, a percentage which has increased yearly. Additionally, ExxonMobil returned 16.3% on employed capital last year.
In the wake of BP’s Gulf disaster, ExxonMobil advantageously has limited operation within the Gulf of Mexico, with its other operations in Africa, Asia and the Middle East.
ExxonMobil’s operation is divided into three main revenue streams.
The first division explores for and produces oil & natural gas, predominantly in the United States, Russia, and the Caspian Sea, and contributed 88%, or $17 billion, of Exxon’s total 2009 revenue.
Secondly, the refining of crude oil and the marketing of the resulting usable oil products, such as gasoline, diesel oil and jet fuel, generated $1.8 billion, or 9% of the total revenue, in 2009.
ExxonMobil’s chemicals division, involved in the manufacturing of petrochemicals and plastics, created 12% of their total revenue at $2.3 billion.
An additional point to consider is that Exxon’s and Mobil’s retail gasoline stations are not owned by the company. In 2008, all of the retail outlets were sold to private investors in order to generate capital and reduce losses. These affiliated gas stations still contribute licensing fees and revenue from purchasing ExxonMobil’s products, thus maintaining their stance as a revenue source even though the company does not see profit directly from resale to the consumer.
After ExxonMobil bought XTO Energy, a producer of shale natural gas, for $41 billion of stock, its resource base increased by 10%, even though it diluted the value of its common shares of stock. However, ExxonMobil has still demonstrated its ongoing intention to increase the value of their stock by spending an average of $30 billion per year on share repurchases over the last 3 years.
ExxonMobil is involved in many developing markets, which are expected to provide for the majority of the world’s predicted increase in oil demand of 35% by 2030.
The company has been consistently increasing its capital expenditures, with projections of $150 billion over the next 5 years.