Is Exxon Mobil a Good Long-Term Pick?
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To explore and invest in a distant country in hopes of finding natural gas and oil is never an easy task. It requires tremendous planning, willingness to take risks, and readiness to lose lots of money if oil or gas isn't found as predicted. However, if operations and explorations are successful, companies can make a fortune.
With that in mind, Mozambique is one of those countries that pose very little risk when it comes to profits and returns. Anadarko Petroleum (NYSE: APC) and Enersis (NYSE: ENI) have been extremely successful, not only in locating huge oil and natural gas reserves but also in creating the right atmosphere for other companies to venture into Mozambique.
Exxon Mobil (NYSE: XOM) seems to have understood the importance of Mozambique and its vast resources of oil and natural gas. Maybe Exxon got the message a bit later than necessary, but once the company begins its operations in Mozambique, it stands to rake in huge profits and ensure a continuous supply of resources.
Empresa Nacional de Hidrocarbonetos oversees much of the foreign tenders and deals in Mozambique. The agency is responsible for attracting foreign oil companies to invest in Mozambique. ENH's exploration director Tavares Martinho recently revealed that Royal Dutch Shell (NYSE: RDS-A) and Exxon Mobil have begun to hold secret talks with the government and local oil authorities to sign new contracts and deals that would help them to enter the booming South-east African nation's oil fields.
Anadarko and ENI have already unearthed a total of 100 trillion cubic feet of natural gas, and if Exxon Mobil begins to explore one can only guess how many untapped resources will be discovered. It is extremely important for Exxon to ensure that deals are struck in Mozambique because it cannot afford to let other American competitors like Chevron enter the country before it does. At the moment, the only American competitor is Anadarko, and it is well-embedded in the Mozambique oil industry. Exxon must be really forceful in signing deals and contracts so that large swathes of oil fields and maritime drilling rights are bagged before other oil companies troop in.
The southern part of the country is relatively unexplored and offers Exxon a great opportunity to drill. In fact, this region can prove to be the single most important hydrocarbon region in the coming years. When deals are struck and the tenders are signed, Exxon will need to invest money in building infrastructure in the south, just as Rio Tinto, Anadarko, and ENI have done in the north and central regions of the country. Rio Tinto has spent a lot of time and money in building essential railways in the north, which also help the company to transport its coal to the ports.
Anadarko, on the other hand, was recently in the news for helping the nation build and use Liquid Natural Gas plants so that LNG fuel could be used for cooking purposes. Such participation at a community level helps foreign corporations create a positive image among local authorities and community leaders. These relationships are extremely important if oil companies want to have access to local resources and find better cooperation when it comes to paying taxes, influencing regulations, and gaining access to newer areas to explore and drill.
Exxon Mobil will need to spend a lot of time learning about the history of the country, which has been marred by civil wars and colonialism. Mozambique is certainly a relatively simple location to invest in when compared to other African countries like Nigeria or Angola, but it is always helpful for companies like Exxon to understand local history before attempting to venture further.
Clearly, the negotiations have all been secret for quite some time, and there is very little information about where Exxon plans to explore and drill in Mozambique. Shell will probably not be able to keep up with Exxon Mobil because it hasn't had a very successful stint in Africa. One may recall that Shell was asked to clean up its act in Nigeria after militants struck its oil pipelines. Exxon has had similar experiences in Nigeria, but it has also signed very profitable deals with Russian authorities. This has allowed Exxon to explore the vast area that spans across Siberia and the Arctic region. With that in mind, Exxon certainly has an edge over other companies that already operate in Mozambique.
Exxon trades at $91 and has a market cap of $422 billion. Its enterprise value is $418 billion and overall, the company is in very good shape. With a profit margin of 10.37% and an operating margin of 11.44%, Exxon will be a great company to invest in. These numbers will only improve once it signs those lucrative deals in Mozambique. With a return on assets of 9.48% and a gross profit of $180 billion, Exxon is one mammoth company that will continue to fetch great financial results for its investors in the long term. The company has a total cash balance of $18 billion and a total debt of $16 billion, which is something that makes few investors frown. Nonetheless, it has an operating cash flow of $55 billion and a levered free cash flow of $16 billion, which should put most investors' worries to rest.
In the short-term, Exxon looks good because of its business in Iraq and the profitable deals in Russia. If it signs lucrative deals in Mozambique and chooses the southern region over the northern, Exxon will be one of the most profitable companies to invest in for the long-term.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. 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.