More than Enough Reasons to Love Exxon Mobil
Despite the world being awash in oil and prices falling below $40.00 per barrel for the first time since August, I’m bullish on Exxon Mobil Corporation (NYSE:XOM). The share price of XOM stock may be down 11.0% since the beginning of the year, but it’s up 7.5% since the beginning of October.
Why am I bullish on Exxon Mobil? Unlike smaller exploration and production companies, Exxon refines its own oil into gasoline. It also has a very profitable chemical business. Thanks to its massive international footprint, strong upstream and downstream businesses, and, most recently, better-than-expected third-quarter results, XOM stock will continue to do well, while others flounder.
Will Exxon Mobil Use Weakness in Oil for Acquisitions?
As the largest publicly traded oil company in the world, Exxon Mobil is a juggernaut that shouldn’t be discounted simply because oil prices are in the gutter. More than a one-hit wonder, this company is a behemoth that isn’t going to go away. Any weakness in oil prices and Exxon Mobil stock should be viewed as an excellent entry point.
Of course, there is plenty of weakness in the oil industry right now and many reasons to be bullish long-term on Exxon Mobil.
For starters, U.S. crude supply is at its highest seasonal level in 85 years. U.S. crude stockpiles climbed to 487.3 million barrels for the week ended November 13, the highest level for this time of year since 1930. (Source: “Summary of Weekly Petroleum Data for the Week Ending November 13, 2015,” Energy Information Administration, November 18, 2015.) Globally, oil stockpiles have soared to almost three billion barrels because of growing output from OPEC and declining demand from Europe and Asia.
It’s the perfect storm for oil bulls. Oil prices have cratered by almost half since last summer, after OPEC maintained its collective output, Russia started pumping out oil, and Iran looked to regain oil revenues lost to sanctions, boosting output by 500,000 barrels.
While oil may be testing the $40.00 level, this doesn’t mean oil prices are going to tank to $30.00 or $20.00 per barrel. What it does mean, however, is that low oil prices will test the bottom lines of smaller companies.
This could help Exxon Mobil increase its holdings and generate additional growth. The company has 3.8 billion shares of treasury stock worth more than $300 billion, so it could easily snap up some solid names that have been hurt by the slide in oil prices.
Exxon Mobil may have a resource base of some 92 billion barrels of oil and gas, enough to keep it going at present rates for some 63 years, but even the biggest publicly traded oil and gas company needs to stay relevant. Luckily, there is no shortage of possible targets for this juggernaut.
One area where oil giants have faced stiff competition is from North American shale production, which is led by small and midsized companies. One name being bantered about as a potential target is Occidental Petroleum (NYSE:OXY).
The company’s U.S. operations are based in the Permian Basin of West Texas and Southeast New Mexico and they account for 13% of the oil produced there. It also has production in the Eagle Ford Shale and other fields in South Texas, the Piceance Basin in Western Colorado, and the Williston Basin in North Dakota. (Source: “United States,” Oxy.com, November 20, 2015.)
Regardless, if Exxon Mobil does pursue an acquisition, it will need to find a company with world-class assets. If it can’t, it won’t do it. That will still benefit investors. That’s because Exxon Mobil is a cash machine that returns its wealth to investors in the form of share buybacks and dividend increases.
Exxon Has Raised Its Annual Dividend for 33 Consecutive Years
Exxon Mobil currently pays an annual dividend of 3.64%, or $2.92 per share, and has grown at an average annual rate of 6.4% over the last 33 years. On top of that, Exxon has not missed paying a quarterly dividend since 1911 and has raised its annual dividend for 33 consecutive years.
What this means is that even during a time of ultra-low oil prices, Exxon Mobil has been able to consistently increase its dividend payouts and maintain an aggressive share repurchase program.
In the 15 years since Exxon acquired Mobil, the company has returned more than $340 billion to investors in dividends and buybacks.
Third-Quarter Results Top Estimates
In the third quarter of 2015, Exxon reported net income of $4.2 billion, or $1.01 per share, a sharp decline over the $8.1 billion, or $1.89 per share, in the third quarter of 2014. That said, analysts were expecting the company to report earnings of around $0.89 per share. (Source: “ExxonMobil Earns $4.2 Billion in Third Quarter of 2015,” Exxon Mobil Corporation web site, October 30, 2015.)
During the first nine months of 2015, Exxon Mobil Corporation purchased 38 million shares of its common stock at a gross cost of $3.3 billion.
While the company’s third-quarter earnings were down significantly over the same period in 2014, they still significantly outpaced analyst expectations. Plus, lower net income and rising annual dividends show the company’s commitment to providing investors with long-term value.
“We maintain a relentless focus on business fundamentals, including cost management, regardless of commodity prices,” said Rex W. Tillerson, chairman and CEO. “Quarterly results reflect the continued strength of our downstream and chemical businesses and underscore the benefits of our integrated business model.” (Source: Ibid.)
Despite low oil prices, Exxon Mobil isn’t going anywhere. If anything, low oil prices open up a world of opportunities for the company. Buy-and-hold investors also have to love the company’s strong share buyback program and consistent increases in the company’s annual dividend.
Even in this environment, or perhaps because of this environment, investors should consider adding XOM stock to their diversified portfolio.