Why Exxon Mobil Stock Looks Good
On Wednesday, Exxon Mobil (NYSE:XOM) held its annual analyst meeting. Shares of the world’s largest energy producer fell by nearly 3 percent in response, which is a huge move for a company whose stock fits into the “widows and orphans” category of investments. No doubt investors were disappointed. However, I believe that this is short-sighted. Investors who were selling and writing negative articles such as this one are far too concerned that the company doesn’t have the production growth or the capex commitment that, say, Chevron (NYSE:CVX) has.
They forget that growth for growth’s sake is not a winning strategy in the long run even if it makes the numbers look good. What we learned from Exxon’s management is that, yes, the company is pulling in its horns somewhat. But this is because it believes that shareholders will benefit more from a focus on the quality of production rather than the quantity of production. The “excess” capital will be used to buy back stock, and the end result will be that Exxon’s production growth on a per-share basis will grow. This is what matters most from the point of view from the individual investor.
If we look at an array of points of comparison between Exxon and its peers (and these are presented very clearly and thoroughly in the company’s presentation, which can be downloaded here), we find that while companies such as Chevron and Total (NYSE:TOT) are cheaper, when we look at conventional valuation metrics such as P/E ratio and price to book value, Exxon is stronger or as strong in other areas that arguably have more significance in the industry such as reserve replacement and return on capital employed. Reserve replacement above 100 percent means that the company is finding more oil than it produces. Over the past five years, only Royal Dutch Shell (NYSE:RDS.A) was able to top Exxon in a pool including Total, Chevron, and BP (NYSE:BP).
More importantly, Exxon is the leader in its return on capital employed, which means that it is only investing its capital in the best opportunities, and the rest of the profits go to shareholders. While some investors are arguing that this is short-sighted as it boosts earnings per share in the near term, it actually has very little to do with this, which is merely epiphenomenal, and in fact the company is leveraging the long term investor’s exposure to its conservative investment strategy.
Ultimately, this strategy is going to pay off in the very long-term, by which I mean a time-frame of 10 years at the very least. Exxon looks out not just quarters or years, but decades as it is currently positioning itself and its shareholders to profit from the energy environment in 1940. The increase in reserves year after year, the high return on invested capital, and the share repurchases at a 12-times earnings multiple are all benefits that seem minimal now, but which will be magnified in 25 years. Other moves that seem to be trivial or insignificant now such as the XTO purchase — which was heavily criticized — or the company’s Arctic exploration, which won’t yield any production for many years are going to pay off big in the coming decades.
But in order to understand this instead of gravitating towards companies with larger dividend yields and lower P/E ratios such as Chevron or Conoco Philips (NYSE:COP) you need to be able to look very far ahead. This is extremely difficult to do when we are enticed into making short term investment decisions. That is not to say that these other companies make for bad investments. Chevron looks to the future as well, as do the other companies I mention in this article. However, when I read through Exxon’s material, I sense that management’s emphasis is on the long-term more so than these other companies.
Ultimately, the companies here should all make relatively good investments in the long run, and as investors we don’t need to take an “either/or” approach to selecting them. However, when we get a solid report from Exxon like the one we saw today coupled with negative price action, I think it becomes very clear that many investors don’t quite “get” Exxon. Those that do, however, can take advantage and enter long-term positions at a better price-point.