ExxonMobil Should Be Central to Portfolio Diversification
ExxonMobil (NYSE:XOM) is the definition of a blue-chip stock. Exxon, of course, is one of the most respected names in both big oil and big business. Exxon may also be described as the most successful enterprise ever built, as only General Electric (NYSE:GE) may rival the energy company in terms of longevity as a mega-cap firm. As an integrated oil company, Exxon explores, refines, and markets petrochemical products. The energy complex is not perfectly correlated to the world economy. In fact, Forbes contributor Robert Lenzner has recently argued that high oil prices triggered global recessions in 1973, 1980, 1991, 2001, and 2008.
Billionaire investor Warren Buffett may also agree that ExxonMobil shares would help shield a diversified portfolio against downside risks. As of December 31, Berkshire Hathaway listed out ownership of 41.1 million shares of ExxonMobil stock within Buffett’s annual letter to shareholders. For Berkshire Hathaway, its ExxonMobil position is now worth $4.2 billion.
The 1999 combination of Exxon and Mobil was an unmitigated coup. The deal, of course, burnished the legacy of oil man Lee Raymond and helped the former CEO earn every single penny of his $400 million retirement package. At the time, the industry was grappling with an oil glut and a near-term collapse in energy prices. In the following years, however, Exxon was to overtake both Wal-Mart and Microsoft as a political lightning rod for income inequality. The gaudy Exxon financials, however, are largely the result of the sheer size and efficiency of the company.
ExxonMobil stock closed out the July 3 trading session at $102.59 per share. At current levels, Wall Street traders have applied a $440.6 billion market capitalization price tag on Exxon. Be advised that ExxonMobil and Apple ($567 billion market capitalization) have largely been left to themselves to duel for the “world’s largest corporation” title for three years running. Last year, Exxon posted $37 billion in profits off $170.9 billion in 2013 sales.
John D. Rockefeller still casts a long shadow above ExxonMobil. Rockefeller built Standard Oil through his commitment to return on equity while also preserving the majority of capital to reinvest back into the business, rather than paying out hefty dividends. At the time of this writing, ExxonMobil return on equity calculates out to a shade beneath 20 percent. Exxon return on equity has historically remained above that of competitors Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP), and BP (NYSE:BP).
According to Bloomberg, Exxon averaged $19.27 in 2013 per-barrel crude oil equivalent costs. For the sake of comparison, Chevron and BP came in at respective $21.48 and $22.66 per-barrel costs through this same time frame.
The Bottom Line
Certainly, John D. Rockefeller would be proud of his creation. From the rise of Standard Oil to its subsequent breakup to the reunion of Standard Oil of New Jersey (Exxon) and Standard Oil of New York (Mobil), the company has maintained the qualities of its exceptional founder: seamless integration, conservative financials, and ruthless execution. Going forward, Exxon shares will continue to offer long-term alpha returns relative to both the S&P 500 and oil majors.
Again, Exxon shares closed out the July 3 trading session at $102.59. At these levels, Exxon stock trades for roughly 14 times earnings while also offering 2.7 percent in yield. Exxon shares are a compelling value relative to Chevron, ConocoPhillips, and BP. Going forward, Exxon will continue to outperform its competitors amid the long-term recovery of natural gas prices. In 2009, Exxon went especially heavy into natural gas after acquiring XTO Energy in a $41 billion deal. For 2014, The U.S. Energy Information Administration has forecast an average Henry Hub natural gas spot price of $4.74 per MMBtu ($3.73 per MMBtu in 2013).
More From Wall St. Cheat Sheet:
- Black Gold: U.S. States Where Oil Is King
- Wait For the Dip: ConocoPhillips Isn’t Running Out of Gas Anytime Soon
- 5 Crazy New Forms of Energy That Just Might Work
Want more great content like this? Sign up here to receive the best of Cheat Sheet delivered daily. No spam; just tailored content straight to your inbox.