It is very difficult to discuss Exxon Mobil’s (NYSE:XOM) business in any detail in a single article. The sheer scale of the company’s operations make it next to impossible to do that. We’re talking about an enterprise that, in its most recent financial quarter, reported total assets worth around $350 billion on its balance sheet. It produces four million barrels of oil-equivalent per day with contributions from every content on the planet.
That said, there are two very interesting things to briefly note about the business. The first is how remarkably well it did during the last downturn. In fact Exxon is the only oil & gas major that has posted positive free cash flow in each of the past five years; a pretty impressive statistic given the massive oil price slump between 2014 and 2016.
There are two reasons for this in my view. Firstly, there is the relatively low cost of its upstream exploration and production division. Take fiscal years 2015 and 2016 as a good guide. Over those two years the company realized an average worldwide price of $32 per barrel of oil equivalent produced (i.e. the average over both liquids and natural gas). Production plus taxes averaged around $17 per barrel over the same period. In other words even during tough slump years the division still throws off plenty of cash.
Secondly, check out the diversification of earnings offered by its other two segments: Downstream and Chemical. The former is also cyclical, though not to the same extent as exploration and production. Between 2013 and 2017 it posted annual earnings that varied between $3 billion and $6 billion and average return on capital employed (ROCE) ranged from a low of 13% to a high of 28%. The Chemical division, on the other hand, is a model of stability. ROCE ranged from 16.5% to 19.5% between 2013 and 2017 and annual earnings grew from $3.8 billion to $4.5 billion. That is a fantastic asset to have in terms of balancing the swings of the Upstream segment.
The one other thing I’d note is that Exxon consistently posts higher profitability numbers compared to its peers. For every dollar of capital employed it has made around 17 cents in profit over the past decade. The average of the other big four – i.e. Shell, Chevron, Total of France, and BP – is around 10 cents for every dollar of capital employed. That doesn’t mean its stock has a god given right to outperform the others, but remember the old Buffet maxim from Berkshire Hathaway 1989 annual report: “it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.
If analyst estimates are accurate then Exxon will earn around $50 billion before interest, taxes, depreciation and amortization (EBITDA) in 2018. Its current enterprise value (EV) – that is the sum of equity value plus net debt – is just under $400 billion. Now, the past five years haven’t been all that exciting on the shareholder returns front. Okay, there has been the not-so small matter of an horrific energy price slump, but in terms of the stock price chart there hasn’t been that much going on. If I were looking for an explanation for that I would start with the fact that at its 2015 low point it still sported an EV of $325 billion.
In other words I wouldn’t get too beat up over Exxon’s (relatively) poor performance. Royal Dutch Shell, for example, spent a whole two years trading with a dividend yield above 6%. Reinvesting those kinds of yields will do wonders for your portfolio. Its biggest advantage being that it got super cheap in the depths of the crisis. Not so with stodgy old Exxon Mobil (though it has returned a respectable 11% per annum since its 2015 bottom). Either way it doesn’t change the fact that this is still an absolute profit machine. At a fair price, or with the benefit of cost averaging, it should do very well for its long-term shareholders.