Exxon's New Projects Make It A Strong Value Buy Now
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Exxon Mobil (XOM) is prepared to surge ahead as it begins a capital allocation program that will see it spending $37 billion per year over the next five years “to help meet the global demand for energy,” in the words of CEO Rex Tillerson. Despite record spending of $18.2 billion in the first six months of this year, though, as the number one natural gas producer in the U.S. Exxon Mobil is not immune to fluctuations in commodities prices. Its second quarter earnings were somewhat lower than expected, at $3.41 per share excluding one-time items.
In addition to lower price realizations, Exxon Mobil was hit by a 5.6% production decrease on an oil equivalent basis due to divestitures and entitlement volumes, as well as lower sales volumes overall. Its profits were largely tied to divestitures during the quarter, but as Exxon Mobil prepares several projects that should boost revenues in the coming years I do not view its most recent numbers as cause for alarm.
New Projects Remain Strong, Could Be Drivers for Exxon Mobil
One of the most recent Exxon Mobil projects to reach production, the Kizomba Satellites project in the waters of Angola, was actually completed ahead of schedule. Barring unexpected obstacles and its massive capital expenditures allocation, Exxon Mobil could bring its other international projects to production ahead of schedule as well, hedging itself against gas prices in the U.S. ahead of a turnaround.
Although its chemicals segment is currently underperforming, growing by only 9% in the second quarter compared to the same quarter a year ago, Exxon Mobil is planning several new projects that could potentially send chemicals growth skyrocketing. To start, the firm is considering an expansion of petrochemical facilities at the Gulf Coast Baytown complex that would include an ethane cracker and product facilities and could start up as early as 2016. This could potentially dovetail with other firms’ downstream plans for natural gas in the region.
U.S. Natural Gas Sector Still Critical
Although Exxon Mobil is losing money on natural gas production on some plays, natural gas prices in the U.S. will not remain depressed forever. With significant acreage in every major onshore play as well as leaseholds offshore in the U.S. Gulf of Mexico, Exxon Mobil is ready to jump back in to the U.S. natural gas markets in a big way once price realizations show signs of stabilizing. This could happen sooner than expected, driven by liquid natural gas export plans by companies such as Cheniere Energy (LNG) on the Gulf of Mexico, which may be the beginning of a legislator supported trend.
With its mid-continent acreage, not to mention its Gulf of Mexico holdings, Exxon Mobil would be one of the first companies to benefit from liquid natural gas exports leaving the Gulf Coast. Despite double digit revenue growth, Devon Energy (NYSE: DVN) is also being punished by lower natural gas liquids realizations, which are contributing to declines in profit. EOG Resources (NYSE: EOG) is another potential beneficiary of LNG exports due to its strong position on the Bakken, where it holds 22 of the 30 best performing wells on the play. EOG also has more room in the core area to drill thanks to a measured drilling approach and innovative downspacing.
The crowd mentality of other oil and gas producers is also hitting profitability for Devon and EOG, since many of the plays on which these companies are operating are seeing an influx of well financed operators, like Exxon Mobil, which is pushing the cost of essential services higher for all players. The price support offered by large scale LNG export accessible to mid-continent and Gulf production would help even the playing field and result in higher revenues for all producers.
A recovery in dry natural gas prices driven by LNG exports would also help Exxon Mobil and its competitors. Rig reductions and asset write downs tied to gas heavy plays like the Marcellus Shale are rampant in the current environment, with Marcellus player EXCO Resources (NYSE: XCO) recently announcing an overall rig reduction, from fourteen to eight, amid a focus on containing drilling and operating costs.
Even strong well results are not enough to prod financially stable players into increased interest. Anadarko Petroleum (NYSE: APC) recently saw strong results drilling the Geneseo formation in its Marcellus acreage. Though Anadarko sees strong prospects here due to the fact that the formation is relatively cheap and therefore less expensive to complete, it will not be aggressively pursuing the potential of this formation at least until prices from the Marcellus improve to between $4 and $5 per mbtu.
I think that LNG exports could bring natural gas prices to more normal levels much sooner than would otherwise occur, which is why legislative support for these exports is a good sign for E&P players. Although all unconventional drillers stand to see a boost in revenues and earnings from a return to normalcy, Exxon Mobil could see a greater benefit than its competitors, due to its larger position and continued holdings despite the temptation to divest in a down market.
Exxon Mobil is currently trading around $88, with a price to book of 2.5 and a forward price to earnings of 9.9. EOG is trading around $110, with a price to book of 2.2 and a forward price to earnings of 17.0, which makes the better diversified Exxon Mobil look like an even stronger buy. Devon is trading around $59, with a price to book of 1.1 and a forward price to earnings of 8.7. Anadarko is trading around $70 with a price to book of 1.7 and a forward price to earnings of 16.1, while EXCO is trading around $8 with a price to book of 2.1 despite its poor earnings metrics.
Exxon Mobil is a consistent earner and also a dividend payer, with current yields around 2.5%. This gives it an aura of stability despite its position as a large value stock. Given its commitment to massive cash investments in the next few years and the fact that it’s most recent investments are yet to show the kinds of revenue growth their potential suggests, I believe Exxon Mobil is a value buy.
jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of Devon Energy. 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.