When Exxon Mobil (NYSE:XOM) reported fourth-quarter numbers, shares only moved marginally. The company’s earnings rose by 6% to $9.95 billion, or $2.20 per share, while revenues slipped from $121.6 billion to $115.17 billion.
Exxon’s stock has been a laggard for a while, too. During the past year, shares are up only 5%.
Could Exxon be a good investment going forward, though? To see, let’s take a look at the pros and cons:
Pros
Refining. This has been a bright spot for Exxon. The refining business has gotten a boost because of the growth in energy production in the U.S., which has depressed prices. The result is that refining margins have increased. During the latest quarter, the profits from the segment triple to $1.77 billion from $425 million in the same period a year ago. In fact, the strength in refining could continue for some time. After all, the U.S. appears to have plentiful amount of new energy sources.
Global Platform. To keep growing, Exxon needs to find massive deposit, which means taking a global approach to finding reserves. To this end, Exxon has promising developments in areas like Nigeria, Angola, Romania, Tanzania, Siberia, Argentina, Colombia and Kazakhstan. The company has also been aggressive in striking large partnerships, including a deal with Rosneft to explore the Russian Arctic.
Dividend and Finances. The yield on Exxon Mobile is a decent 2.6%, plus the company has a long history of increasing dividends and generates substantial cash flow. In fact, Exxon Mobil is one out of only four companies that has a credit rating of AAA. What’s more, the valuation for Exxon’s shares look attractive; it’s P/E ratio sits right above 9.
Cons
Oil and Gas Production. Over the past few decades, it has gotten tougher to find new reserves. Of course, this is not just a problem for Exxon but also the other mega operators like Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP) and Royal Dutch Shell (NYSE:RDS-A). As for Exxon, the company reported a 5% decline in production for the quarter. While it has been aggressively investing in exploration, it looks like there will not be any major fields to come on-line during 2013.
Natural Gas. Even though prices have rebounded, there is still a glut on the market. The fact is that producers continue to generate large amounts of natural gas. Keep in mind that back in 2010, Exxon shelled out a whopping $41 billion for XTO Energy, which was a top natural gas operator, and that has since been a drag on earnings.
Political Risk. In many cases, the company needs to find ways to work with governments that may be politically unstable. Risks include potentially higher taxes, regulatory roadblocks and even nationalization.
Verdict
Exxon essentially operates with an integrated model — that is, the company has businesses that are vertically integrated across the energy business. Over the years, Wall Street has been somewhat skeptical of this approach … but it appears to be off-base. If anything, the integrated model has helped Exxon find ways to grow.
However, as for 2013, the environment could be challenging. There will be no mega-projects that will boost production. And its other businesses — like refining and chemicals — will probably not be large enough to make up for the weakness.
In other words, the stock price may not have much momentum. So for investors, the cons outweigh the pros on the stock — at least for the next couple quarters.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
