A Smart Long-Term Play in Oil & Gas

Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

ExxonMobil (NYSE: XOM), which operates a $19 billion liquefied natural gas project in Papua New Guinea, expects a supply more than 10 million metric tons of LNG annually by 2025. Natural gas demand is forecast to rise by more than 60 percent by 2040 according to the company, and the Asia-Pacific region will account for 29 percent of total worldwide gas demand with consumption in the U.S. and Europe unchanged or declining. The company's development is on target to start shipments in 2014, even after a 21 percent cost overrun.  Exxon has been reiterated by TheStreet Ratings as a buy in view of the demonstration of its strengths in many areas such as such as attractive valuation levels, good stock price performance and a solid financial position with reasonable debt levels. I believe these strengths more than compensate for the fact that the company has had below par growth in net income.

Third Quarter Highlights

Exxon's highlights for the third quarter of 2012 show earnings of $9.57 billion decreased $760 million or 7% from the same quarter of the previous year. Earnings per share (assuming dilution) were $2.09 a share, a decrease of 2% from the third quarter of 2011. Capital and exploration expenditures were $9.2 billion, up 7% year on year. Oil-equivalent production decreased 7.5% from the same quarter of the previous year and if you exclude the impact of entitlement volumes, OPEC quota effects and divestments, production decreased by just under 3%. Cash flow generated from operations and asset sales was $14.0 billion, including the proceeds of asset sales of $0.6 billion. Share purchases to reduce shares outstanding were $5 billion while earnings per share at $0.57 increased 21% compared to the same quarter of 2011.

Exxon's upstream earnings were $5.973 billion in the third quarter of 2012, down from $2.421 billion year on year. Production volume and product mix reduced earnings by $700 million while lower liquids and natural gas realizations decreased earnings by $130 million. All other items, including the absence of prior year asset sales ($1.0 billion), unfavorable tax items and foreign exchange impacts, reduced earnings by a total of $1.6 billion.

Downstream earnings were $3.19 billion, up $1.611 billion from the third quarter of 2011. Downstream margins, mainly refining, increased earnings by $850 million, while volume and mix effects were essentially flat. All other items, including higher gains on asset sales of $360 million, favorable foreign exchange effects, and lower operating expenses, increased earnings by $780 million. For the first nine months of the year, earnings were up 10% to $34.93 billion while earnings per share increased 16% to $7.50. Cash flow generated from operations and asset sales for the speed was $49.8 billion and the company distributed roughly $23 billion to shareholders through dividends and share purchases to reduce shares outstanding.

The Competition

Chevron (NYSE: CVX) has been reiterated by TheStreet Ratings as a buy. The analysts feel that the company's strengths demonstrated in many areas, such as its largely solid financial position with reasonable debt levels, attractive valuation levels and increase in stock price during the past year outweigh the below par growth in net income. Meanwhile, the stock recommends itself as an income investment with a dividend yield of around 3.4%. The annualized growth in cash dividends paid since 2007 is in excess of 6% and EPS growth has been almost 4 times since 2003. 

Cheniere Energy (NYSEMKT: LNG) has just been recently licensed to be the first and only exporter of liquefied natural gas to the rest of the world from the U.S., and with current U.S. surpluses at record highs, this was a major win for the company. Now it's pushing hard to expand its liquefaction and export facilities in the Sabine Pass and Corpus Christi, Texas, to take advantage of its excellent market positioning. Credit Suisse calculates that the addition of a fifth and sixth train at Sabine Pass is worth revenue and earnings that would add $4 a share to the stock.

All this expansion is going to need outside financing, which the company has been able to secure by issuing new shares to the likes of Blackstone which have purchased its initial $500 million units. Chesapeake’s (NYSE: CHK) stock price has been beaten down by the many negative circumstances affecting the company and a further setback could depress the stock price even further if the market chooses to punish it for its debt. Chesapeake Energy has been reiterated by TheStreet Ratings as a hold. The analyst notes that the company's strongest point has been a solid financial position based on a number of different debt and liquidity measures.  At the same time, there are evident weaknesses including weak growth in the company's earnings per share, deteriorating net income and below par return on equity. In my opinion, any further decline could well create a buying opportunity. 

The global oil market is about to change radically according to the experts at the International Energy Agency (IEA). The IEA's World Energy Outlook has predicted that the U.S. will become the world's largest oil exporter in eight years by 2020. Exxon has already announced that it will start selling off the 60% stake it owns in the West Qurna-1 oil field in Iraq starting next month.  Apart from Exxon, other oil majors are looking at putting out of politically unstable regions such as the Middle East and Central Asia.  It has been reported that ConocoPhilips (COP) has decided to sell its stake in the Kashagan oil field in Kazakhstan even at a loss that could touch $500 million. 

Conclusion

Exxon has benefited from higher refining margins in Europe and the United States this year because of oil supply problems, but most analysts predict that margins will be back to normal in 2013 as global capacity kicks in.  The company is being hit on cash generation from operations precisely at a time when it requires substantial resources to reposition its global oil business.  The company is huge and extremely stable. Investors should watch the stock closely and buy on dips to $86 and hold this company for the long-term. 

 


jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, and short JAN 2014 $15.00 puts on Chesapeake Energy. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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