Enhance Your Portfolio with This Energy Stock
Jhumpa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Everybody wants to invest in a good stock that is going to offer the best returns in both the near future and also long term. Energy stocks are lucrative choice for the investors given the fact that it is a limited resource with a huge global demand. ExxonMobil (NYSE: XOM), one of the world's largest companies in terms of both revenues and market capitalization engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. It is also the largest of the oil supermajors: BP (NYSE: BP), Chevron (NYSE: CVX), Royal Dutch Shell (NYSE: RDS-B), and ConocoPhillips (NYSE: COP).
ExxonMobil increased its exposure to natural gas a few years ago, while other companies have pulled back. As natural gas prices remain weak due to oversupply, it may adversely affect the profitability of the oil companies. However, demand is moving up as the fuel continues to replace coal as a source of electricity.
Recently, ExxonMobil signed an exchange agreement with Denbury Onshore, LLC to acquire 100 percent of Denbury's Bakken shale assets. This will increase ExxonMobil's holdings in the Bakken region by 50% to nearly 600,000 acres, giving the company a significant presence in one of the major U.S. growth areas for onshore oil production. So, ExxonMobil has a chance of a substantial upside here.
ExxonMobil is currently trading around 52-week highs of $92.50 per share. In the last ten years between 2002 and 2012, the share prices have climbed from $25.46 to $91.52. However, price gains have been lower than Chevron’s.
ExxonMobil continues to pay higher dividend amounts to its investors each year. Since 2001, the annualized dividend amount has been growing steadily at an average rate of 7% per year. Its current yield is decent at 2.47%, however lower than Chevron’s 3.1% yield. The company has a P/E ratio of 9.7, equal to the average energy industry P/E ratio and below the S&P 500 P/E ratio of 17.7.
The current EPS (ttm) of $9.49 outperforms that of the industry and its competitors BP, Shell and Conoco but is lower than Chevron's. Exxon can provide stable income, as its payout ratio increased to 21%, less than half the industry average. Also, Exxon is projected to grow its EPS by 8.2% over the next several years.
It looks like the peers are cheaper than ExxonMobil in terms of trailing P/E and they also pay higher dividend yields. Shell offers highest dividend yield of 5.3%. It and BP might actually be better buys if the dividend is a significant factor for investors. ExxonMobil should trade at higher earnings multiple due to its market positioning, and so it might otherwise be a good pick.
Exxon’s Q2 results reflect net income growth by 49.0% when compared to the same quarter one year prior, rising from $10.7 billion to $15.9 billion. However, the quarter earnings of $15.9 billion included a net gain of $7.5 billion associated with divestments and tax-related items. Excluding these items, second quarter earnings were $8.4 billion.
Exxon's debt-to-equity ratio is very low at 0.10 and is currently below that of the industry average, implying that there has been very successful management of debt levels.
The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. In comparison to other companies in the Oil, Gas & Consumable Fuels industry on the basis of return on equity, Exxon has underperformed in comparison with the industry average, but has greatly exceeded that of the S&P 500.
Exxon is a stable company with strong fundamentals given its sheer size and longevity in business, which has survived through many recessions in the past. The company's strengths can be seen in multiple areas, such as its solid stock price performance, compelling growth in net income, conservative management strategies, solid financial health with reasonable debt levels, attractive valuation levels and notable return on equity.
The company’s dividend is also decent at 2.47%. While other majors offer a higher dividend, Exxon Mobil's dividend is generally more stable, and is certainly generous, given that the firm as a whole is on a better footing than many of its peers.
I believe demand for natural gas will not be forever low and the gas prices will rebound in short or medium term. Investors will eventually see the natural gas benefit on Exxon’s stock prices if investment horizon is long. For me, ExxonMobil is a solid buy from a long term perspective.
jhumpasarkar has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. 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.