Exxon Mobil Corporation’s (XOM) Slow But Steady Pace

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Oil giant Exxon Mobil Corporation (NYSE:XOM) may soon be losing its CEO. Rex Tillerson was recently selected by President-elect Donald Trump to serve as the next Secretary of State and could move into that role early next year, but the selection is just a nomination at this point and subject to Senate approval. It may also prove contentious as there are concerns about Tillerson’s oil and gas business dealings with Russia.

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The concerns seem speculative, however, and could prove nothing more than a close business relationship with Russian President Vladimir Putin, who rules in stark contrast to a well-functioning (well, functioning) democracy like the U.S.

From Exxon’s perspective, the move isn’t a big blow — Tillerson was already slated to be replaced by Darren Woods, the No. 2 executive in the country.

Tillerson has spent an estimated four decades at Exxon, which has a reputation for taking things slowly and steadily when it comes to both choosing its leaders and running its vast business of global oil and gas assets. This has led to fantastic returns for XOM shareholders over the years and is an important reason the company generates as much annual profit as Bolivia reports in GDP each year.

One of the best measures to determine if a company is serving shareholders well is its return on invested capital (ROIC). Exxon’s ROIC has consistently been among the highest of the large energy firms. Before oil prices plunged, ROIC averaged in the 20% range, and even exceeded 30% nearly a decade ago.

However, Exxon’s returns have fallen significantly in recent years. Like any oil and gas company, its profit is highly dependent on the market price for a barrel of oil or natural gas. The OPEC oil cartel met recently and decided to lower production in an attempt to shore up the price of oil. The jury is still out on whether this will help much, though.

Oil and Share Price Volatility

Oil prices bottomed in January at less than $30 per barrel, but have recently ticked back above $50. That is a far cry from the peak of $141 back in 2008, and prices were consistently above $100 until May 2014, when they started to fall rapidly.

Few predicted that oil prices would fall so far or fast, and natural gas prices have been in a multi-year rut thanks to hydraulic fracturing (fracking) techniques that have helped revive production in the U.S.

XOM stock price volatility has mirrored the ups and downs of oil prices. Exxon’s stock price hovered above $100 per share until the May 2014 oil drop. It bottomed in late 2015 at roughly $72 per share as oil prices were reaching their lows, and has since recovered to just over $91 per share.

The Slow Recovery

Profit at Exxon is only expected to total $2.26 per share this year, but analysts project a quick recovery to $4.11 for 2017. That’s a far cry from the nearly $10 reported in 2012, but it will at least cover the dividend payout of $3.00 per share per year.

Analysts also predict Exxon’s cash flows will recover. In 2015, XOM didn’t generate enough cash flow to cover capital expenditures (capex) and pay dividends to shareholders. In prior years, management also bought back tens of billions of dollars of Exxon’s own shares, which helped boost earnings (because of less shares outstanding).

Capex in 2015 was $31.1 billion, but is expected to drop 25% to roughly $23 billion this year. Most of that will go to “upstream” (exploring for and producing energy) businesses, with the balance to making chemicals  and the “downstream” (refining energy to turn it into gasoline and pure natural gas, and other petro-chemicals that can be used to make plastic and other goods) business.

A combination of higher oil prices and lower capex (both through spending less and selling off less-appealing energy assets) should put the company back on more even financial footing. The company also plans to stay focused on “investments based on [a] longer-term view,” which it detailed at its annual investor conference back in May.

Still a Best-in-Class Investment

Exxon’s ROIC dipped to 7.9% last year, but was still higher than its peer group. Management highlighted this at its conference and showed that BP plc (ADR) (NYSE:BP) reported a negative return last year. Chevron Corporation (NYSE:CVX), Total SA (ADR) (NYE:TOT) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A, NYSE:RDS.B) all reported ROIC’s below 5%, and only Chevron has been able to post a long-term average above 10%. Below this level companies aren’t even covering their costs of capital.

At the conference, XOM management touted a dividend that has grown 10% annually over the past decade. The payout has also increased for 34 straight years. Since Exxon and Mobil merged back in 1998, the company has returned close to $360 billion to shareholders in the form of dividends and share buybacks.

Over the long haul, Exxon sees energy demand growing 40% by 2040 and traditional oil and gas (versus alternative energies such as wind and solar power) will still meet 60% of demand by then. Clearly, oil and related fossil fuels are here to stay for many decades.

The Bottom Line

Over the past 20 years, XOM stock has outperformed both its peers and the market overall (S&P 500).  Over the past decade, it has beaten its peers, but the market has outperformed.

Exxon is still beating its peers over the last five years, but again the market is ahead. That will likely persist until oil prices return closer to $100 per barrel. In the meantime, management is getting more stingy on how its spends to explore new oil and gas fields, and slowing its share buyback activity.

It’s difficult to see XOM stock rallying significantly from current levels, but Exxon remains one of the best investment candidates in the large-cap energy space. Investors can also garner a 3.3% dividend yield and get paid to wait for a recovery in energy prices.

As of this writing, Ryan Fuhrmann did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/12/exxon-mobile-corporation-xom-slow-but-steady-pace/.

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