Perhaps more importantly, Exxon is now finding that oil more cheaply than its rivals. According to data provided by Bloomberg, XOM spends about $19.27 to find a barrel of crude oil. That’s less than the $21.48 per-barrel at rival Chevron (CVX) and $22.66 for beleaguered BP (BP). With a plethora of new projects set to begin pumping out crude in 2015 and beyond, Exxon looks to continue minting plenty of cash.
And as we know, cash is music to Buffett’s ears.
XOM is a cash flow machine, and, despite its earnings drop, the energy firm still managed to make a staggering $7.87 billion or $1.79 per share in profits for the last quarter. Those hefty cash flows have continuously made their way back to shareholders via dividends and share buybacks. Exxon managed to hand out roughly $5.8 billion of that cash back to shareholders in the third quarter alone. And with a low payout ratio and a long history of dividend increases on its book, Buffett is setting himself up for long term at XOM.
Meanwhile, he’s buying that cash on the cheap.
Exxon shares are tantalizing value based on various metrics. XOM currently trade at a forward P/E just north of 12 — roughly a 23% discount to the broad market’s forward multiple. The valuation is cheaper than many of its large integrated rivals and even cheaper when compared to U.S. shale-focused independent E&P firms like Southwestern Energy (SWN). Meanwhile, other metrics like price-to-book value and price-to-sales also tilt towards XOM’s favor.
Snagging Up XOM Shares
Exxon is truly is like a cheaply priced bond and is priced for success. So no surprise that Buffett took the plunge in a big way — XOM has all the hallmarks of a Berkshire holding. Ultimately, Buffett’s buy of XOM shows just how cheap shares have gotten over the last few quarters
For individual investors, that cheapness could mean it is time to add Exxon to a portfolio.
Following Buffett’s lead into Exxon makes a whole lot of sense. Over the long term, XOM’s history of dividends makes it a powerful portfolio ally. While it might not “explode” upwards like some smaller shale-focused firms, the firm will continue to pump out oil, dividends and cash flows years to come. That makes XOM an ideal buy & hold for any portfolio.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.