Today, we’re looking at Exxon Mobil (NYSE:XOM). It’s about as pure an oil play as you are going to get in the stock market, short of actually buying drums of oil to store in your basement.

Exxon explores for oil and — when found — refines it. It also does the same for natural gas. The company also manufactures products made from petroleum and engages in the transportation of all of the above. Some of the products it makes include plastics. How many oil wells do you think Exxon Mobil operates? A few thousand? Wrong. Try 30,000, all over the world.

The key driving factor for Exxon Mobil is energy consumption. Now, while demand fluctuates here and there, the world as a whole consumes a lot of energy. While Exxon Mobil does handle a ton of oil, it doesn’t really have much influence over oil prices themselves. That’s the real determinant in how much profit XOM generates in any given year. However, as I’ve written about before, the world always will need oil. Virtually everything runs on oil, and will for the foreseeable future. The U.S. alone consumes 20.7 million barrels daily. Emerging-markets demand also continues to grow. In other words, no one will get hurt investing in oil for the long run.

With a company like Exxon Mobil, then, growth isn’t super-important. Free cash flow is the thing to keep an eye on because oil operations are expensive. So as long as free cash flow is chugging along and exceeds debt service, you’re safe in XOM.

The company carries $10.3 billion in cash and $12.1 billion in debt at a blended interest rate of only 2%. That’s extraordinary. Trailing 12-month free cash flow was $26 billion. Yes, that’s “billion” — with a “B.” The company also has three times the amount of free cash flow necessary to pay its 2.7% dividend.

Stock analysts looking out five years on Exxon Mobil see annualized earnings growth at 6.5%. Not so hot. However, earnings are expected to grow 40% this year alone, on top of a 50% increase in FY 2010. A stock price of $73, on FY 2011 earnings of $8.61, produces a current P/E of 8.5. BP (NYSE:BP) trades at 6.15, and Chevron (NYSE:CVX) at 8.1. So on a relative P/E basis, XOM is more expensive than its peers.

Conclusion

But P/E really isn’t the way to value an oil company. The enterprise-value-to-EBITDA ratio (or EV to cash flow) is a better way to determine relative valuation on cash flow-rich companies. Chevron is at 4.21, Exxon Mobil is at 5.61, BP is at 4.65 and ConocoPhillips (NYSE:COP) is at 3.9. So Exxon Mobil is the most expensive; however, its net margins are 9.6% to Chevon’s 10.6%. Conoco’s are 5.3%. BP has its share of problems, facing a $30 billion settlement over the Deepwater Horizon spill.

Quite frankly, you can’t go wrong with XOM, and its valuation is not so out of whack with its peers to make it seem terribly expensive.

• I believe Exxon Mobil is a buy for regular accounts.
• I believe Exxon Mobil is a buy for retirement accounts.

Lawrence Meyers owns shares of CVX and XOM.