Exxon Mobil (NYSE:XOM) is certainly a bedrock of stability. After all, the origins of the company go back to the legendary John D. Rockefeller, who created the company in 1870. He instilled a DNA of long-term thinking and disciplined execution. And yes, these values continue today.
But in terms of an investment, Exxon stock has not been impressive. During the last five years, the return was actually -2%.
So what’s the problem? Why the sluggishness? Well, of course, the energy business is challenging, involving heavy investments in finding new sources that may ultimately not pan out. There are also the issues with alternative energy, as seen with the strong growth in Tesla’s (NASDAQ:TSLA) electric vehicles. And finally, the emergence of new technologies like fracking has brought much more supply to the markets.
While all these are certainly important issues, I think much of the bad news is baked into XOM stock. If anything, the valuation is currently at a fairly attractive level, representing an interesting value play.
What Makes Exxon Mobil Different?
One key is that unlike other oil operators, such as ConocoPhillips (NYSE:COP), the company has not engaged in spinoffs. Instead, Exxon Mobil remains a fairly diversified platform that includes major assets for exploration, refining and retailing. It also has a solid chemicals business. Because of this, Exxon Mobil is better able to withstand the wrenching volatility.
What’s more, the long-term fundamentals for energy remains particularly bright. According to the latest Exxon Mobil Investor Day presentation, there will be a requirement of new supply of 550 billion barrels of oil and 2,100 trillion cubic feet of natural gas. This will mean that overall investment will have to increase by a whopping $21 trillion. No doubt, a major driver is the potential growth in Asia (about 50% of the growth is projected to come from India and China, which have a combined population of 2.5 billion).
Exxon Mobil is positioned to benefit. Keep in mind that the company has been making bold investments in ramping production.
In the latest earnings call, the company’s vice president of investor relations Neil Hansen noted: “We reached final investment decision for nine major strategic projects in just the first six months of the year, including projects from all three business lines. Offshore exploration success continued with four significant deepwater discoveries, three in Guyana and one in Cyprus. And we achieved key milestones in the development of two of our LNG growth projects in Papua New Guinea and Mozambique.”
The company is also getting traction with its liquids production, with volumes up by 7% or 144,000 barrels per day. A big part of this has been the investments in the Permian basin. In this region, the goal is to hit 1 million oil equivalent barrels per day by 2024.
Bottom Line on XOM Stock
Exxon Mobil remains a strong generator of cash flows. In the latest quarter, they came to $7.2 billion, up about $1 billion on a sequential basis (this is after adjusting for seasonal factors).
Thus, the company is in a strong position to keep up the investments in exploration as well as engage in mergers and acquisitions. Oh, and yes, there should be continued increases in the dividend. In fact, the company has hiked the payout for 37 consecutive years (the latest was up by 6%).
True, among other oil companies like BP (NYSE:BP) and Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B), the yield is somewhat lower. Yet XOM stock’s 5.1% yield is still standout — and backed up by a strong platform and the potential for growth from production in the coming years.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.