June 16, 2010
Current Price – US$62.46


Exxon Mobil is the world’s largest publically traded integrated oil and gas company. The company can be viewed as having three major business segments: Upstream (i.e. resource extraction, drilling), Downstream (refining and retailing) and Chemical (i.e. plastics, polymers and industrial chemical production). Exxon appears to be particularly attractive at this time as global recessionary conditions have caused a reduction in revenues and margins while negative perception of oil and gas companies stemming from BP’s Gulf of Mexico problems has further depressed share prices. However, the longer term earnings drivers for Exxon remain strongly positive. The primary drivers for Exxon are crude oil prices, retail prices and volume demand. The fundamental economic conditions of the industry; diminishing supply and growing global demand (particularly in emerging markets where demand is expected to grow at 2.5% annually through 2030), indicate that prices and margins will improve rapidly as the World recovers from this recession. While substitute sources of energy continue to be developed, there is no real scalable, economically viable, substitute that presents a competitive threat to Exxon’s business model in the foreseeable future. Exxon leads the major producers in its industry in terms of ROE, Operating Margins and Debt/Equity, and has a projected dividend yield of 3.0%. During the recent economic downturn Exxon has continued to invest excess cash flow in new capital projects, repurchase shares from the open market and increase dividends at a reasonable rate.


Valuation

Based on a blend of valuation methods (discounted cash flows, dividend discount model and, historical and industry price ratios) I arrive at a current valuation for Exxon Mobil of US$75.94.

Expected return should this price be realized in the markets within the next 12 months would be:

Price yield      21.6%
Dividend yield  3.0%
Total return    24.5%


Risks
Source: Exxon Mobil
  • Economic – such as general economic growth rates and the occurrence of economic recessions, the development of new supply sources, and adherence by countries to OPEC quotas.
  • Political, Legal, Regulatory – such as political instability, lack of well-established and reliable legal systems resulting in expropriation or forced divestiture of assets or unilateral cancellation of contracts, laws and regulations related to the environment, trade restrictions and price controls, tax or royalty increases, war or civil unrest. 
  • Weather – such as instability of seasonal patterns that affect energy demand or severe weather events that can disrupt supplies or operations.
  • Technology – such as advances relating to energy usage or the competitiveness of alternative hydrocarbon or other energy sources, or the occurrence of unforeseen technical difficulties.
  • Industry Structure – such as reservoir performance and natural field decline, changes in operating conditions and costs (including third party costs).

The Numbers

Share Price ($US) 62.46 
Market Cap ($M) 295,811 
No. Shares (M) 4,736 
ROE 18.7%
ROA 8.7%
P/E Ratio 14.2 
Price/Sales Ratio 0.9 
Price/Book Value 2.7 
Price/FCF 33.1 
Price/Book (tang) 2.8 
Current Ratio 1.1
Interest Coverage 62.5 
Total Debt/Equity 0.1


Disclosure - At publication of this analysis I hold no position in this security, but may take a long position in the future. I do not take short positions in any of the stocks reviewed on this site, nor do I receive any compensation from the companies studied for publication of my opinions.


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