by Aaron Levitt | March 10, 2014 4:04 pm
Exxon Mobil (XOM) has been a pretty sad story for the past few years. As one of the largest integrated energy stocks out there, XOM has had trouble keeping up with production — especially in terms of “Texas tea.” During the past few years, Exxon Mobil has seen overall production dwindle as various legacy fields have dried up.
That has been a big issue amid rising oil prices; namely, Exxon Mobil has missed out on some pretty sizable profit potential. Meanwhile, XOM stock has floundered and underperformed many of the smaller independent shale producers, such as EOG Resources (EOG).
However, one of the United States’ biggest energy stocks might finally have regained its oily mojo. The percentage of Exxon’s reserves that are liquids-based has surged recently, and the producer has several new oil-based production projects set to hit the tape this year.
That could be turning XOM stock into a buy … as soon as this year.
While Exxon Mobil’s profits declined in 2013 thanks to issues in its downstream/refining segment,the integrated energy major did manage to produce some bright spots. Namely, XOM found more oil than several other major energy stocks.
According to data compiled by Bloomberg, Exxon now has 53% of its reserves in oil and natural gas liquids (NGLs) vs. dry natural gas. That compares to just 51% logged in 2012. The key has been that Exxon has been able to discover and add enough crude oil to help boost its reserve replacement ratio. In 2013, XOM managed to replace nearly 153% of the crude oil and NGLs that it pulled out of the ground via production. That’s a stark contrast to recent years, where natural gas was the driver of its replacement ratio.
All in all, Exxon managed to finish 2013 with proved reserves of 25.2 billion barrels of oil equivalent.
That can be seen as a major win for Exxon and XOM stock. The company’s 2010 mammoth $35 billion purchase of XTO made it the largest producer of natural gas in the U.S. That buyout was largely criticized, as the timing of the deal was made just before natural gas prices imploded to record lows. Exxon — along with other natural gas-focused energy stocks — have struggled in the low-price environment.
But with a higher “oil cut,” Exxon maybe finally silencing critics. If that doesn’t do it, its slate of new projects starting production this year just might.
Ten of Exxon’s major projects are expected to begin pumping energy throughout this year. These include expansions of Imperial Oil’s (IMO) oil sands production in Canada, new deepwater wells in the Gulf of Mexico as well as finally seeing production from its partnership in Russia. XOM will start producing oil from the largest offshore oil and gas platform in that nation within a few months. These projects will add about 300,000 barrels per oil equivalent per day to Exxon’s production.
What’s more is that these projects will help Exxon expand its liquids production by 2% this year and 4% each year from 2015 to 2017. Overall, by the time we flip the calendar over to 2017, oil and NGLs will make up around 69% of Exxon Mobil’s total production.
Exxon’s bullish news on the liquids production front could do wonders for XOM stock. The “reasonably priced high-quality bond” is now only getting stronger.
As we all know, owning XOM stock is about owning its hefty cash flows. Despite the recent earnings hiccups, Exxon is still minting a ton of cash each year. And those cash flows are only going to get better as it produces more valuable oil and natural gas liquids. Prices for these commodities continue to be rich, and the various geopolitical events coupled with rising demand will only keep them high.
That benefits Exxon on the profit margin front. It also benefits investors in XOM stock, as the firm can now send more of that cash back into their pockets via dividend growth and buybacks. Exxon Mobil has increased cash dividends for the last 31 years at an average rate of 10% each year.
But more could be on the way.
Currently, the payout ratio of XOM stock is only about 33%. That leaves plenty of room for more increases down the line — especially when you factor in that Exxon will earning more for its production of oil and NGLs.
That only strengthens the appeal of Exxon’s bond-like nature. Shares of XOM stock can be had for a forward P/E of under 13. That could seem like a real long-term bargain once Exxon’s oil ambitions start flowing and cash flows trickle back to investors. And while Exxon yields just 2.7%, again, the potential for dividend increases down the road is attractive. After all, long term, it’s not about the yield right now, but your yield on cost.
For those looking for a steady Eddie dividend holding, XOM stock continues to be where it’s at.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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