Why Exxon Mobil Stock Looks Good
On Wednesday, Exxon Mobil (NYSE:XOM) held its annual analyst meeting. Shares of the world’s largest energy producer fell by nearly 3 percent in response, which is a huge move for a company whose stock fits into the “widows and orphans” category of investments. No doubt investors were disappointed. However, I believe that this is short-sighted. Investors who were selling and writing negative articles such as this one are far too concerned that the company doesn’t have the production growth or the capex commitment that, say, Chevron (NYSE:CVX) has.
They forget that growth for growth’s sake is not a winning strategy in the long run even if it makes the numbers look good. What we learned from Exxon’s management is that, yes, the company is pulling in its horns somewhat. But this is because it believes that shareholders will benefit more from a focus on the quality of production rather than the quantity of production. The “excess” capital will be used to buy back stock, and the end result will be that Exxon’s production growth on a per-share basis will grow. This is what matters most from the point of view from the individual investor.
If we look at an array of points of comparison between Exxon and its peers (and these are presented very clearly and thoroughly in the company’s presentation, which can be downloaded here), we find that while companies such as Chevron and Total (NYSE:TOT) are cheaper, when we look at conventional valuation metrics such as P/E ratio and price to book value, Exxon is stronger or as strong in other areas that arguably have more significance in the industry such as reserve replacement and return on capital employed. Reserve replacement above 100 percent means that the company is finding more oil than it produces. Over the past five years, only Royal Dutch Shell (NYSE:RDS.A) was able to top Exxon in a pool including Total, Chevron, and BP (NYSE:BP).
More importantly, Exxon is the leader in its return on capital employed, which means that it is only investing its capital in the best opportunities, and the rest of the profits go to shareholders. While some investors are arguing that this is short-sighted as it boosts earnings per share in the near term, it actually has very little to do with this, which is merely epiphenomenal, and in fact the company is leveraging the long term investor’s exposure to its conservative investment strategy.