Given the energy markets’ continued malaise, many investors have sought refuge in the biggest energy stocks. The idea is that their size and scope is enough to get them through the current low-price environment intact and profit when oil and natural gas prices rebound.
Well, you can’t get any bigger than Exxon Mobil Corporation (XOM).
As one of the world’s largest energy firms in terms of production, assets and reserves, XOM continues to get the nod from investors and has actually held up better than many of its strictly shale-focused peers over the last year or so.
However, despite being the king energy stock, XOM isn’t without its warts. There are some issues with the former Standard Oil. The question for investors is whether or not, they should “put a tiger in their tanks.”
Here’s three pros & cons for XOM stock.
Pros for Exxon Mobil
Still A Profit Machine: When your main source of profits is derived from a commodity, any dip in that the price of that commodity is going to hurt, and XOM is no different. However, Exxon is still churning out healthy profits and cash flows, despite the lower oil prices. Over the last nine months, XOM still managed to make a whopping $13 billion in profits. While that is still down from last year, that’s an amazing amount considering just how far oil has slid. The firm should continue to be profitable for the last quarter of 2015 and analysts expect XOM to make money in 2016 as well. And just like before, Exxon still has the goods to keep paying its sector-leading dividends. The firm still managed to return around $3.6 billion to shareholders through dividends and buybacks.
Opportunities For Growth: This sort of environment is exactly what XOM needs to find great production growth. Assets — both prices for raw acreage and rival energy stocks — are now super cheap. Exxon with its huge cash balances, cash flows and amount of treasury stock sitting on its balance sheet can basically have the pick of the litter when it comes to adding fields, reserves and other projects. And given its mega-size, almost any energy stock in the world could be buyout bait for the super-major. Additionally, XOM could finally take the master limited partnership (MLP) plunge and spin-off its vast midstream infrastructure network in the U.S. Rival Royal Dutch Shell (RDS-A, RDS-B) did this recently with Shell Midstream Partners (SHLX) and has great success with drop-downs and additional cash flows/tax savings. XOM could do the same in 2016.
Price: At the end of the day, XOM is still pretty cheap. Shares of Exxon can currently be had for a price-to-earnings ratio of around 16. That’s less the broader S&P 500. What’s more is that when looking the rest of the energy sector, many firms aren’t currently profitable at all. That P/E of 16 — while not as cheap as XOM has been in years past — starts to look pretty good when comparing it the vast bulk of energy stocks. XOM’s 3.9% dividend yield is also pretty good looking as well.
Cons for Exxon Mobil
Poor Cash Flow Growth: Now, Exxon is still a money making machine. The problem is that it hasn’t been making as much as previous years. That’s a problem for investors looking for hefty dividend increases and buybacks. XOM only saw free cash flows of around $2.7 billion in the latest quarter. That’s about half of a year ago. Unless oil and natural gas prices begin to really move higher over the next few months, investors may be met with a stagnating payout for a few quarters. Likewise on the buyback front. The dividend is far from endangered, it just might not grow like weeds.
Big Projects May Not Pay Off: Given just how big the supermajors are, they need big multiyear energy projects to really get the needle moving. And XOM is no exception. The problem for Exxon is that many for these projects — oil sands production with Imperial Oil (IMO), LNG terminals in Papua New Guinea, etc. -– are coming online at just the wrong time. They were launched during a time when oil and natural gas were much higher. With that in mind, these projects could be a drag on earnings and have longer payback times for Exxon.
Lower E&P Earnings: The beauty for XOM is that as an integrated energy firm, its refining and downstream operations have been able to chow down on lower oil prices. That’s helped keep back the tide of lower overall earnings at XOM. However, Exxon is still a very “gassy” energy stock and receives a lot of its profits/revenues from natural gas. Hot weather and lower electricity demand continue to put pressure on natural gas prices and what oil production XOM does have is now coming in at low prices not seen for around 11 years. Some analysts have begun to question, whether Exxon’s E&P units might actually begin seeing a loss. There’s only so much that refining can cover.
XOM Stock Could Still Be A Buy
Given the pros and cons, XOM stock could still be a buy for longer-term and patient investors. The idea — at least for the next year or so — is to just get through the lower-price environment intact. Exxon will certainly do just that. It has plenty of wiggle room to overcome many of its near-term issues. Profits should continue to dip and cash flows might not be as robust, but its balance sheet flexibility does pretty much ensure that it will make it through to the other side.
What’s more is that it has the ability to potentially come out even better, thanks to carefully timed buyouts and acquisition activity.
Investors buying today, just need to realize that the near term might not be as bright for Exxon. Longer term, the future is still rosy.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
