As it is, Exxon Mobil Corporation (XOM) is already a world-class energy stock. Still, there are a few things it could do that would make XOM stock and the company itself even more attractive to investors.
For starters, there is a lot of emerging market demand to be met.
The CIA factbook offers some startling information. U.S. consumers gobble up 5.9 barrels of oil for every 100 people. However, when you blow out to the rest of the world and its 6 billion people, those folks are living on about 25% of that amount – something around 1.46 barrels per 100 people.
If you drill down further, no pun intended, you find that 52% of the world is only burning through half a barrel per 100 people.
The implications are staggering. The rest of the world is way behind us as far as energy consumption, but they are growing and have a long way to go. That means a lot more demand coming down the pike over the next generation, which likely means oil prices will go higher.
Implications for XOM Stock
Thus, XOM needs to produce more oil and do so in a very modulated way so as not to over-produce. The key for ExxonMobil is to resurrect this massive deal between it and Rosneft to explore in the Russian arctic. That means getting sanctions lifted, and that likely means getting Donald Trump elected.
Trump is likely to endorse business in all forms.
Second, ExxonMobil should put a ton of money into increasing refining capacity for the West Coast. Gas prices here are outrageously high compared to the rest of the country. By investing in refinery capacity, XOM stock could enhance its control over the market and deliver more gasoline to consumers, get the cost of gasoline down and get more market share by delivering and selling in volume.
Finally, XOM has a unique opportunity in the shale arena. For many years, ExxonMobil looked outside the U.S. for production. Recently, however, it turned back to the U.S., and now domestic wells account for about 20% of crude production. At the right price, which is about $54 per barrel, US shale makes sense for ExxonMobil as far as being competitive with overseas drilling.
Now, when oil is under $75 per barrel, a lot of shale producers ran into big problems. They were already debt-heavy and paying junk-bond rates for their capital.
ExxonMobil has made some acquisitions in the space and should make more rather than reinvent the wheel. XOM has economies of scale that smaller shale players do not have, allowing it to make money at lower prices.
Bottom Line for ExxonMobil
For now, ExxonMobil stock is in great financial shape. Trailing-12-month earnings were $13 billion. Even in this lousy environment, it still generated about $27.2 billion in operating cash flow, $3 billion in free cash flow, and paid out $12.4 billion in dividends.
It has close to $40 billion in cash and long-term investments.
ExxonMobil stock is arguably expensive at the current price around $90. However, assuming oil prices will recover, and because XOM is so good at capital allocation and operating cash flow, if you intend to hold for the long-term, I think you can open a position here.
As of this writing, Lawrence Meyers does not own shares of XOM.
