ExxonMobil (XOM) is the flagship integrated energy company in the world, but that sword can cut both ways, as recent quarters have shown.
When things are good in the energy sector, there are few that benefit more broadly and deeply than XOM. With operations from upstream exploration and production (E&P) to downstream retail operations and everything in between, its diversification and sheer size make it a force to be reckoned with.
However, when the energy patch pendulum swings from bullish to bearish, XOM sees all its operations get hit. That’s the downside of diversification.
But the upside is, not all its eggs are in one sector.
For example, right now E&P is getting smashed in the U.S. and slowing considerably around the world. Fortunately, XOM’s upstream operations aren’t where it derives a large amount of its revenue. Downstream is where XOM is a major player, and low prices keep demand high in the consumer market. Also, a stable U.S. economy helps drive commercial demand.
Granted, margins are tighter on the downstream side, but it’s better to have a few tough quarters with thinning margins than to have no business at all, like many focused upstream players are grappling with right now.
XOM Benefits From Smart Leadership
XOM’s current operating margins are some of the best in the industry, and that shows how well-managed the company is, given its large exposure to oil. Chevron (CVX) historically has some of the industry’s highest operating margins, largely because it has more exposure to natural gas, which hasn’t been as volatile.
While XOM is off 10% for the year, it has been on a tear since late August, relatively speaking. Currently trading in the mid-80s, it was into the mid-60s just about two months ago.
That’s quite a turnaround for a company of this size and scope given no real change in market conditions or major corporate news.
But the reality is, XOM was cheap. This company is not going out of business, yet at one point it was being priced like there was unlimited downside. Now, the overselling is done and the stock has come back to more rational levels for a dominant stock in a sector that’s gutting through a bear market.
Bottom Line
Recent third-quarter 2015 earnings were good, but only in the context of a market where prices are down 60% from last year. XOM stock’s adjusted revenue was only off 37% year over year. That is evidence that the company used its size effectively — not to its detriment — in leveraging operations where it still had more pricing advantages. That shows smart leadership, and that’s why XOM remains a foundational growth stock for the long term.
Another signal of XOM’s market-leading strength is the fact that while it’s off 10% year to date, the SPDR Select Sector Energy ETF (XLE) that holds most of the top energy stocks is off 12% in the same period.
And if you still need convincing about this stock’s attractiveness at these levels, it also delivers a rock-solid 3.5% dividend yield that can be reinvested.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.
