This Oil Stock Provides a Good Investment Opportunity

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

Many investors are worried about a fall-off in ExxonMobil’s (NYSE: XOM) 2H12 volumes relative to peers. However, I suggest them to take it as a grain of salt as the company’s strong long term growth prospects are intact. Going forward, after a transition year in 2012, I believe Exxon’s performance will be huge positive given scheduled projects add to volume and cash flow confidence while also reducing future capital intensity. Also, I believe Exxon’s investment opportunity set is improving and highlight areas of longer term growth potential. Altogether, Exxon appears to be a strong long term investment.

Project to Drive Cash Flow Higher

By the end of 2012, Kearl, one of the Exxon mega-projects, should come on-stream. Altogether, these major projects are expected to add around 1MBOED of new production by 2016.  I believe that the cash flow per barrel on these projects will be higher than Exxon’s existing production and more importantly, a number of these projects provide long plateau production volumes, helping to reduce future capital intensity. The net result is increased confidence in Exxon’s future earnings power and free cash generation.

Long Term Growth Visibility

In my view, visibility is more over growth beyond 2016 and thus, makes Exxon a good long term investment. In my opinion; Firstly, XOM has a substantial low cost North American shale gas portfolio which could grow into an expected demand recovery in US gas; Secondly, Exxon has had some conventional exploration success recently with discoveries in the Gulf of Mexico, with gas discoveries in Romania, Tanzania, and Vietnam. Exxon has a number of offshore exploration play tests in the Faroes and in Guyana that could open new basins; Lastly, Exxon’s Sakhalin project has been a financial success and a stable project for all stakeholders. Exxon has won two potentially exciting opportunities in Russia (1) the Kara Sea JV (2) the Bazhenov shale. I believe the company has ample long term visibility to gain traction of investors interested in long term investment.

Not Overvalued at All

The following table summarizes the expected annual growth for next 5 years , ROE, dividend yield and forward PE of the five major oil producers including BP (NYSE: BP), Chevron (NYSE: CVX), Total (NYSE: TOT), ConocoPhillips (NYSE: COP), and ExxonMobil:

Company

Expected Annual Growth for next 5 Years

Dividend Yield

ROE

Forward PE

BP

3.3%

4.38%

15.71%

8.5

Chevron

1.63%

3.07%

21.68%

9.4

Total

7.1%

5.54%

16.26%

7.45

ConocoPhillips

-2%

4.54%

11.25%

10.23

ExxonMobil

7.47%

2.47%

28.33%

11.31

The company is currently trading at a premium valuation which I believe is justified as the company’s expected EPS growth is highest among its peers. The company has historical  record of superior ROE relative to its peers. Even after the expense of pursuing long-term unconventional resource growth as it seeks to gain both access to resources and unconventional technical capabilities through acquisitions, the company has highest ROE among its peers which further supports its premium valuation.

In my view, the growth options to drive Exxon’s production higher beyond 2016 are becoming more and more visible. I expect projects ramp-up as Kearl in particular to drive cash flow higher and reduce capital intensity. I again suggest investors to overlook  Exxon ‘s 2H12 volumes and focus on strong long term growth drivers. I recommend it a buy for long term and advise investors to wait for better entry point.


sandeep2gupta has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron 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.

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