ExxonMobil is a powerhouse in the oil and gas industry. We recommend that the Investment Group purchase more ExxonMobil stock. Our recommendation is based on ExxonMobil’s diverse product lines, its financial strength, and its future expansion opportunities. Its upstream and downstream products enable it to weather economic changes. It is a well-managed company with a low debt ratio and high cash flows. ExxonMobil is expanding its operations at Point Thomson, in the Permian Basin, Brazil, the Asia Pacific, and Indonesia. It is predicting that the increase in the global population and growing global economy will increase the demand for oil and gas. ExxonMobil believes that solar, wind, and other “clean energy” will not be able to keep up with the increasing global energy demand.
ExxonMobil Stocks – Buy, Hold, or Sell?
What is does the future of the stock market look like to investors? According to the Federal Reserve Chairman, Jerome Powell, the market is strong, even though it drops up to .44% every time he speaks to the media (Cox, 2018). reports that the Dow Jones is closing at some of its highest levels (2018). Bruce Bittles, chief investment strategist at Baird stated, “The healthiest markets occur when the uptrend is broad base, which is not the situation in the present example” (Imbert, 2018). Overall corporate earnings have grown by 25% in the first two quarters of 2018 and if the growth continues, companies could see record breaking earnings in the third quarter (Imbert, 2018). Investors want to know what stocks will give them the best return on investment. We believe the best option for the Investment Group is to buy more ExxonMobil. In this paper we will look at ExxonMobil’s current and projected performance, what analysts are saying about it, and why it is the right investment.
ExxonMobil is the largest publicly traded multinational oil and gas company and has been in business for more than 135 years (Fin Op, 2018). It is a very conservative company, run with long-term goals (Brewer, 2018). Exxon maintains financial balance with upstream and downstream operations, when one is struggling, the other is performing relatively well (Brewer, 2018). ExxonMobil’s debt to equity ratio is 0.12, which is lower than those of all its major competitors, enabling ExxonMobil the ability to weather any storm (Brewer, 2018). ExxonMobil’s second quarter earnings per share (EPS) were valued at $0.92, an increase of 18%, however, this is below the expected $1.26 (Rich, 2018). Revenues were $74.5 billion, a 17% increase over the expected $70.25 billion (Rich, 2018). Upstream earnings increased by 157%, while downstream earnings decreased by 48% (Rich, 2018). Scheduled maintenance and foreign exchange rates were reasons for the downstream decrease (Rich, 2018). Production fell to its lowest in nearly a decade, causing ExxonMobil to cut its full-year output (Rich, 2018). However, ExxonMobil is predicting it will have a one-year growth rate of 3.71%, compared to the 1.65% growth rate from 2017 (XOM, 2018). Production in the Permian Basin and Bakken shale increased by 30% (Rich, 2018). Capital and exploration costs increased 69%, due to investment in Brazil, the US Permian Basin, and Indonesia (Rich, 2018).
ExxonMobil’s SWOT analysis shows strengths in its diversified geographic revenue stream, its upstream and downstream operations, and its extensive research and development activities (ExxonMobil SWOT, 2018). The weaknesses include litigation and an increase in debt to capital from 2013 to 2017 (ExxonMobil SWOT, 2018). Opportunities include its acquisitions, rising energy demand, and growth initiatives. Threats include supply-related risks, economic conditions, and regulations (ExxonMobil SWOT, 2018).
Even though ExxonMobil’s competitors are investing in wind, solar, and other “clean energy”, ExxonMobil is continuing with oil and natural gas (Brewer, 2018). ExxonMobil believes that the continued global demand and slower than expected transition to “cleaner” energy will continue growth through 2040 (Brewer, 2018). ExxonMobil foresees that by 2040, the world’s population will reach 9.2 billion people (Fin Op, 2018). The company believes that the world economy will likely double, moving billions of people into the middle class (Fin Op, 2018). Efficiency improvement will curb the global energy demand by 25 percent by 2040 (Fin Op, 2018). ExxonMobil believes even with an increase in “cleaner” energy, the higher overall demand will allow natural gas and oil to continue to play a leading role in the world’s energy mix (Fin Op, 2018). ExxonMobil CEO, Darren Woods said “Society has aspiration for economic growth, reliable, and affordable energy and environmental protection. We see our role as helping close the gap between what people want and what can be responsibly done” (Crowley, 2018). ExxonMobil has plans to invest $200 billion in traditional oil and gas megaprojects through 2025 (Crowley, 2018).
In December 2017, ExxonMobil entered into an agreement with the State of Alaska to increase the development of the Point Thomson facilities (MacKenzie, 2018). The development will increase the production of oil to 50,000 barrels per day and increase natural gas production to 920 million standard cubic feet per day (MacKenzie, 2018). The Point Thomason development could lead to Alaska becoming a global leader in natural gas production (MacKenzie, 2018).
Another area in which the company hopes to improve is its chemical lines. ExxonMobil plans to increase manufacturing capacity in North America and the Asia Pacific by about 40%, this will be accomplished by building or acquiring 13 new facilities (Zacks Equity Research, 2018). In doing this, ExxonMobil will increase its ability to meet demands from emerging nations.
Since 2009, ExxonMobil has invested $600 million with Synthetic Genomics to develop a low-cost algae fuel (Helman & Taesik, 2018). The fuel is created by algae that produces oil compounds using only sunlight, carbon dioxide, and added nutrients (Chatsko, 2018). A breakthrough in 2017 nearly doubled the amount of oil produced; by 2025 the companies want to be able to produce 10,000 barrels per day (Chatsko, 2018).
ExxonMobil is putting $1 million toward lobbying efforts to institute a carbon tax (Crooks, 2018). The carbon tax would encourage companies to reduce emissions, while eliminating regulations and ligation (Crooks, 2018). The proposed carbon tax would allow the costs associated with emissions to be predictable (Crooks, 2018).
What do the Analyst Say?
ExxonMobil has had solid gains since August 2018 and their dividend is double that of the S&P 500 average (Seeking Alpha, 2018). From an analysist’s point of view, ExxonMobil has a flat EPS, which means it is a good, mature company, it is almost debt free, has positive cash flows, and a good return on equity (Seeking Alpha, 2018). This demonstrates that ExxonMobil is a well-run company with a good management team
According to Michelle Rey with MarketRealist.com, of 20 analysts, six advised buy, 11 advised hold, and three advised sell. ExxonMobil’s forward PE and forward EV to EBITDA are both above peer averages, which could indicate it is trading at a premium value (Rey,2018). This could be why some analyst recommended to hold or sell (Rey,2018). Analyst who advised to buy looked at ExxonMobil’s strong upstream portfolio that has expected growth into 2025, with over 100 projects in various stages; its downstream segment also has many projects on the horizon (Rey,2018). An increase in oil prices could boost its earnings and cash flow, leading to a reduction in its debt levels, which could strengthen the value of its stock (Rey,2018).
Exxon Mobil’s yields are higher what they were in the 1990’s; price-to-book-value is lower than it has been since the 1980’s; and long-term debt is only 10% (Crowe, DiLallo, & Brewer, 2018). Even though there is risk involved, it is minimized by the balance sheet strength (Crowe et al., 2018). Opportunities are plentiful, the demand for oil and gas energy is predicted to increase in the next 5 to 10 years and new technological advancements will make accessing shale oil cheaper (Crowe et al., 2018). The biggest driver of oil demand will be increased global economic activity (Crowe et al., 2018). Risks include decline in oil prices and rising costs due to inflation which could both cause profits to drop (Crowe et al., 2018). Other risks include changes in regulations concerning oil and gas production and usage (Crowe et al., 2018).
ExxonMobil is in a financially sound position, it has diversity in its products, and has invested in research and development. Even through its third quarter EPS was down from the expected amount it still had an increase and its dividend is double the S&P 500 average. Both indicating it is a well-managed firm. The diversity in its products protects it from fluctuations in the world economy. ExxonMobil is investing millions of dollars in expanding of production in both upstream and downstream products. ExxonMobil is lobbying for solutions to monetize carbon emissions thus enabling the cost associated to predictable. It realizes the importance to society for cleaner energy, however it understands that oil and gas have a role play in the growing energy requirements for the future.
ExxonMobil has a plan, it knows where it is headed in the future, and it has identified the path to get there. Its sound management decisions reflect in its strong financial statements. It recognizes its challenges and works to find solutions. It understands that society wants and desires clean energy, however it is aware that oil and gas will still play a major role in providing energy to the growing global community. Our recommendation is to buy ExxonMobil.