Over the past three years, Exxon Mobil (XOM) stock has noticeably underperformed compared to its four super-major peers: Chevron, Royal Dutch Shell, BP and Total of France. Consider a $10k investment in Exxon stock three years ago, which is currently worth just $10,780. In contrast, that same $10,000 lump sum invested into any one of its peers would be worth anywhere between $14,300 and $17,800. (Note this analysis assumes continual reinvestment of dividend cash).
In truth, there is no great mystery behind Exxon stock’s recent poor performance. The fact of the matter is that its shares never really got cheap during the oil price crash of 2015/16. In fact, the cheapest they have been over the past few years was actually just before last Christmas. Compare that to, say, Royal Dutch Shell stock, which lost almost half of its value between 2014 and 2016.
That said, the past is the past, and right now Exxon is a decent long-term proposition. I say that for two reasons. The first is a point I’ve made a number of times when it comes to dealing with very cyclical industries like oil & gas. As a general rule of thumb, an okay time to buy is when conventional valuation metrics look reasonable in times of “normal” commodity prices.
Does that apply right now? Well, Texas light sweet crude oil currently trades for just under $60 a barrel. In terms of future oil prices, that strikes me as pretty ‘middle of the road’. I mean, a barrel of crude has priced everywhere between $15 and $100 over the past few decades. Now, Exxon should make around $5.50 per share in annual profit within the next two years at constant $60-oil. Plugging that figure into the current $80.50 share price leaves us with a forward PE ratio of under 15. On that basis, I’d chalk the stock up as reasonable in terms of valuation. The outlook from that level certainly surpasses the last three years of poor returns.
The second reason relates to the company’s cash flow situation. It has improved, a lot, and from an already decent base I should add. For instance, over the past decade Exxon has spent roughly $260b in total on capital expenditures. This line is obviously very important for oil & gas companies given that if they don’t replace what is pumped from the ground, at some point they will cease to exist.
In Exxon’s case, that $260b actually went a bit beyond the “steady state” scenario of maintaining operations. Indeed, the firm actually replaced around 110% of the volume that it pumped out of the ground in that time. Total cash generated from operations clocked in at around $395b over the same period, while the total spent on cash dividends amounted to almost $110b. Finally, the average oil price over the period was just over $70 per barrel.
Ok, now let’s take last year in isolation. Exxon generated over $36b in cash from its oil, gas and chemical operations. After subtracting capital expenditures and dividends, it had $7b left over, of which $5b went toward debt reduction. The average oil price over 2018 was only around 7-8% higher than current prices. My takeaway from all of these figures? Exxon should continue to pump out billions of dollars in surplus cash at $60-oil. With a starting earnings yield of around 7%, it is not a bad long-term buy at current oil prices.
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