Exxon is Cheap Relative to the Rest of the Market
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
ExxonMobil Corp (NYSE: XOM) is one of the biggest and most stable companies in the world. Given the company's low PE ratio relative to the S&P 500 and steady growth I believe the company is currently a buy. One of the main advantages of investing in an oil major over the juniors is the ability to weather the business cycle. As world GDP growth slows and equities keep a relatively high valuation [see the first graph below] investors need a degree of safety in their portfolios. Buying companies at attractive PE ratios provides one degree of safety and buying companies which are built to endure downturns givens a secondary degree of safety.
Based on the most recent earnings statement Exxon's PE ratio is about 9 while the S&P 500 is 16. By using the PE ratio based on the past 10 years the above graphs show that the company's PE ratio is around 14.5 while the market's is at 21. Still the PE ratio is about 33% below the market average based on 10 year earnings. Exxon continues to increase earnings and revenue by developing new supplies. 2011 saw a serious increase in the number of net wells drilled over the past 3 years. Yet, the difficulties in developing crude oil supplies while fighting with the NOCs has taken its' toll. Over the past 3 years total oil liquids production has decreased. Natural gas continues to be a major growth area for the company as it grew from 3,932 to 4,506 in thousands of oil equivalent daily barrels from 2009 to 2011. One of the strengths of Exxon is that fact that it has not hedged its production in a major way. Given the synergies created by their downstream and upstream operations and thus reducing the risk that the company would even face an event like the Amaranth blow up.
As the chart below shows Exxon has some of the strongest margins when compared to other international and nation oil companies. BP p.l.c. (NYSE: BP) has seen great difficulties lately. Though they currently have a lower PE ratio than the other majors they are still disadvantaged. Their margins have not kept up compared to the industry and the recent disaster in the Gulf of Mexico forced them to sell off some of their assets. They face continued friction in Russia and uncertainty in the ligation process in the United States. Chevron Corp (NYSE: CVX) is comparable to ExxonMobil as they have been able to maintain their margins though their 5 year revenue growth is only 3% compared to Exxon's 4.5%. Total SA. (NYSE: TOT) and Petroleo Brasileiro S.A. (NYSE: PBR) are respectable NOCs. The recent fall in margins and propensity for governments like Brazil to set rates means that there is an extra degree of risk.
Exxon offers solid growth, dividends, and a well run company. Though the company faces a decline in crude oil production they continue to invest in growth areas like bitumen production and Kazakhstan. It is important to continue watching production growth as the increased protectionism and difficulty in finding new reserves means that growing production volumes is challenging. Still, the declining oil supply means that prices will stay strong over the long term. To a degree the upstream business will help to maintain margins and revenue. Exxon is not perfect but it is a well diversified company which is undervalued relative to the broad market. Their 2.6% yield is not amazing, but the underlying business is strong.
MrCanadian1 has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron, Petroleo Brasileiro S.A. (ADR), and Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.