Despite the boom in energy sector, shareholders of integrated oil stock Exxon (XOM) haven’t exactly been jumping for joy. XOM stock has suffered and is now one of the worst performers among major oil producers. XOM has only managed to produce a 2.6% gain this year — about one-third the performance of its biggest rival, Chevron (CVX).
The giant oil stock’s performance looks even worse compared to smaller, shale-focused E&P firms like Range Resources (RRC) and Cabot Oil & Gas (COG).
Much of the underperformance is the result of several issues that continue to plague XOM: everything from dwindling production and higher costs to the ill-timed bet on natural gas via its XTO acquisition. And investors seem to be abandoning the former oil king.
However, with XOM recently reporting third-quarter earnings, it seems that some of these problems facing the integrated oil stock have begun to work themselves out. While that’s certainly a positive sign, the more important news is that Exxon is looking like a value play now that it’s sorting out those issues.
So, should you buy shares in the world’s largest publicly traded oil stock at current levels? Let’s take a look at some of the pros and cons of XOM:
Rising Production: The name of the game for major oil stocks the past few years has been finding new ways to boost production. As traditional legacy fields have begun to dry up, production has begun to slip fast. In the previous quarter, Exxon saw oil and natural gas production fall about 1.9% — the eighth consecutive quarter of year-over-year production drops for the energy giant. But XOM may have gotten the tiger back in its tank. The oil stock managed to see a 1.5% increase in its output of oil and natural gas, thanks to a slate of new projects that pushed output back over the 4 million barrels per day mark. From increased natural gas output in Australia to oil from Nigeria and Canada, XOM saw gains.
Still Minting Cash: Despite the 2% drop in revenues and the 18% drop in profits, Exxon still managed to make more money in three months than many firms make in an entire year. Profit in the third quarter for XOM was $7.87 billion or $1.79 per share. This sheer amount of money means that Exxon can still reward shareholders in other ways — namely through dividends and monster buybacks. Exxon Mobil spent about $3 billion on share buybacks in the latest quarter and has authorized another $3 billion for the fourth quarter. Meanwhile, there’s still room to raise XOM’s already-juicy 2.9% dividend yield.
Valuation: At the end of the day, XOM stock is cheap — dirt cheap. At about 11 times estimated 2014 earnings of $7.97, Exxon’s valuation is cheaper than many of its rivals and even cheaper when compared to high-flyers like previously mentioned Cabot. Analysts expect earnings to grow by about 70 cents next year, and 3% over the longer haul. That makes the oil stock a tasty bargain indeed.
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.