Should I Buy XOM? 3 Pros, 3 Cons

Production is up, but refining is still hurting the company

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Should I Buy XOM? 3 Pros, 3 Cons

Cons

Costs, Costs, Costs: no matter how you slice it, it’s getting pretty expensive to drill for crude oil and natural gas these days. Hydraulic fracturing and deepwater drilling all require pretty big CAPEX budgets, and Exxon has felt the brunt of those costs. Exxon’s unit production costs have tripled since 2003 and have climbed 23.5% since 2010. So far, XOM has spent roughly $41 billion on CAPEX and drilling this year.

Refining Still Hurting: Unlike rival ConocoPhillips (COP), Exxon has decided to keep its refining and downstream units in-house. That’s proving to be a poor decision. As crack spreads for U.S. benchmark West Texas Intermediate and international standard Brent have narrowed, refining margins have plummeted — to the tune of an 81% plunge in profit at the company’s refineries. With improving crude-by-rail and pipeline infrastructure relieving bottlenecks, analysts estimate that refining margins could be crimped for some time. That could hurt XOM’s earnings despite production gains.

Leveraged To Shale Gas: With a $392 billion market cap, XOM is a behemoth. The $41 billion purchase of XTO back in 2009 made the oil stock a natural gas superstar. Unfortunately, that strategy has back fired as fracking has continued to drive down the price of natural gas. At the same time, XOM isn’t heavily present in two of the best prospective production areas — the Gulf of Mexico’s deepwater, and domestic shale oil plays like the Eagle Ford. XOM shareholders could be missing out on some of the best “oily” gains ahead as these two areas continue to show huge results. Just ask EOG Resources’ (EOG) shareholders what shale oil can do for a stock price.

The Bottom Line

There’s no doubt about it, Exxon is still one of the biggest and best-run energy firms, which has helped the company overcome some of its production issues. On the other hand, there are still some big things to worry about — namely the costs and dwindling crack spreads at its upstream business units. Those problems have hindered (and could continue to hinder) XOM’s potential

So should you buy XOM? It depends on your goals, but you could certainly do worse. As respected value investor Don Yacktman recently put it — “Exxon is like a reasonably-priced high-quality bond.” That’s a good position to be in — unless you’re looking for growth, in which case it might be time to pass on the oil stock.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/11/buy-xom-3-pros-3-cons/.

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