All You Need to Know About the Biggest Oil & Gas Play

Rahul 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)), the biggest oil and gas company in terms of market capitalization, was formed in 1999 by the merger of Exxon and Mobil.

As per the latest ”DividendRank” report, ExxonMobil is among the Dividend Channel's ”S.A.F.E. 25” stocks, reflecting strong yield and a consistent track record of at least two decades of dividend growth. ExxonMobil announced its earnings, so let’s explore present performance and future endeavors.

Unimpressive earnings

For the second quarter, ExxonMobil posted its lowest quarterly profit in more than three years. Earnings came in at $6.9 billion, down 57% from the same period in 2012. Revenue came in at $106 billion from $127 billion last year. Earnings were below the analysts' estimates while revenue was inline.

Production for the quarter was down 1.9% year-over-year and 2.7% for the half year. For the past eight quarters, Exxon has been reporting declining year-over-year oil and natural-gas production; however, from 2014 through 2017, the company expects production to expand by as much as 4% a year owing to more than two-dozen major oil and gas projects in the pipeline.

Growth drivers

ExxonMobil and Rosneft recently announced the completed formation of joint- venture framework for Kara Sea and Black Sea projects. Both firms have also finalized agreements on seven Arctic license areas in the Chukchi, Laptev and Kara seas. Apart from these, both firms have also laid the foundation for a joint venture to implement a West Siberia tight oil pilot project, and have moved to the next planning phase for a liquefied natural gas (LNG) project in Russia. The strategic cooperation agreement between ExxonMobil and Rosneft will boost production and save on costs.

ExxonMobil has already started the development of the Julia oil field in the Gulf of Mexico. The Julia oil field is expected to have nearly 6 billion barrels of resources in place, and will begin producing oil in 2016.

In late April, ExxonMobil announced the start-up of the Kearl oil sands project in Alberta, Canada. Kearl has access to 6 billion barrels of resources, which is enough to meet energy needs for the next 40 years.

A couple of months back, ExxonMobil announced the expansion of a Singapore chemical plant, which will now produce ethylene from the facility’s second world-scale steam cracker. As per the company, the expansion “gives ExxonMobil unparalleled feedstock flexibility in the industry” and will help to meet the growing demand from growth markets like China, Indian sub-continent and beyond.

ExxonMobil recently applied for a permit from Canadian authorities to set up a liquefied natural gas export terminal in the country's Pacific Coast. The move will help the company to benefit from the price differences present across the Pacific Ocean.

Comparison with rivals

 

Share Price*

Market Cap

52-Week Range

PE

Forward PE

ROE

XOM

91.62

407.42B

84.70 - 95.49

9.31

11.30

28.86%

BP

41.81

133.52B

39.58 - 45.45

5.88

7.49

18.32%

CVX

123.58

239.63B

100.66 - 127.83

9.34

10.06

19.47%

*As of Aug. 2

ExxonMobil and Chevron (NYSE: CVX) have similar price-to-earnings (PE) ratios while BP's (ADR) (NYSE: BP) PE is on the lower side. The PE for all three companies is less than the industry average of 10.6, which may suggest that BP is slightly undervalued. In terms of ROE, ExxonMobil is the clear leader while BP and Chevron have a similar ROE as of July 26.

For the second quarter, BP posted earnings of $1.32 on revenue of $94.7 billion, which beat the consensus estimate of $1.13 and $62.3 billion, respectively. Total production dropped 1.5% owing primarily to natural field declines across the portfolio.

BP’s production is still haunted by the oil spill disaster in 2010, however to make up for the loss it started production at five projects in 2012, and plans 10 additional projects by 2014. Despite the efforts,  production will decline until 2014 and is expected to rise thereafter.

Chevron, the second-largest U.S. oil company in market value after Exxon Mobil, posted a 26% fall in earnings for the second quarter. For the quarter, production of global oil equivalent was down 1.6% compared to 2.1% for the first two months of the quarter. Unlike rivals, the company has less exposure to domestic unconventional plays and will not majorly benefit from rising domestic natural-gas prices.

Instead, the company is more focused on international liquefied natural gas and deepwater Gulf of Mexico exploration, but here also it is facing challenges meeting project and cost schedules.

Buybacks and dividends

For the second quarter, ExxonMobil announced a cut of $1 billion on its share buyback, the first drop since the end of 2010. Though the reduced spending on share buybacks did disappoint investors, it should be lauded that even in such uncertain times the company plans to create value for shareholders. ExxonMobil increased the dividend in the second quarter by $0.06 to $0.63. ExxonMobil has increased its annual dividend payment for 31 consecutive years.

Analysts, hedge funds and short interest positions

The consensus rating on ExxonMobil is “Hold” and the consensus price target is $96.40. As per FINRA data for June, ExxonMobil had a short interest of 1.0% of its float, which is marginally less from the prior two-week period.

At the end of the first quarter, 51 of the hedge funds tracked by InsiderMonkey were bullish on ExxonMobil, which is a decline of 12% from last quarter. 

Opinion

ExxonMobil has been persistent with share repurchases and dividends, except for the recent cut of $1 billion. Profits, like other companies in the sector, are largely dependent on the price of oil. However, ExxonMobil’s investors need not worry, as a low payout ratio keeps dividends safe and sustainable. Even for the current quarter, the company's announced buyback, while lower, will still boost earnings. Also, the globally diversified assets protect it from economic uncertainty.

ExxonMobil does have some potential value drivers, but there is a bit of uncertainty over the second-quarter results. So, for the time being, a ‘wait n watch’ strategy should be apt for investors.

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Rahul Jaiswal has no position in any stocks mentioned. The Motley Fool recommends 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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