Exxon Mobil Corp (XOM): A Look At The Company, Price and Valuation
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Industry Leading, Strong Company with Strong Management led by CEO Rex W. Tillerson, in an important industry that is under distress.
Despite fall in Oil price, Demand for Oil is Not Waning
Quick and Dirty Discounted Cash Flow Analysis shows Value Even Modeling Significant Short term Decline in Revenues
Despite the calamity in the oil market, you might be surprised to find out that Exxon Mobil Corporation (NYSE:XOM) has only had a total return of about negative 5 percent in 2014 including dividends. The oil supermajor has bounced off its 52 week low of $86.19 which it hit on December 16th, 2014 and pays a 2.96 percent dividend-yield (12/26/2014). The company has grown dividends about 10 percent a year over the last 10 years.
The company has a trailing 12-month earnings per share of $7.95 and, expected 2015 operating earnings per share of $6.90. This would represent a 4 percent decline from the Expected $7.18 of EPS in 2014.
Demand for Oil
Company has shifted towards High-grade Higher-Margin Barrel
In recent quarters and years the company has made the trade-off of high grading its portfolio at the expense of lower production volume growth. The company has selected projects with higher-margin.
Oil a commodity, and cylical
While no one knows when oil will stop its fall, Exxon Mobil is a leader. Oil like most other commodities is cyclical in nature. If the fall continues or prices remain low, companies with the financial wherewithal to weather the storm such as Exxon Mobil will start snapping up assets at bargain bin prices sooner or later. Throughout history, this scenario has played out innumerable times.
In a CNBC interview in early December, CEO, Rex Tillerson said that the company is prepared for $40 crude and noted that the company considers fluctuating commodity prices before it considers any project and looks at them as long-term investments, not just what they produce in the moment.
“What you do is ensure that you can invest and be successful at the bottom of the cycle,” he said. “We test across a range that’s all the way down to $40 and up to $120.”
Warren Buffett’s Berkshire Hathaway holds a position in Exxon
While never a reason to act on its own and coming with a number of caveats including the fact that Berkshire’s size limits the companies they can look at, Buffett’s ownership provides incentive for a double look. Warren Buffett initiated a position in Exxon Mobil Corporation in 2013. Buffett’s original cost-basis in Exxon Mobil was between $86.42 and $95.2 per share, with an estimated average price of $90.22. He currently owns 41,129,643 shares according to the last form 13-F filed by Berkshire Hathaway.
Discounted Cash Flow Analysis shows Upside even in Distressed Scenario
Our quick and dirty model finds XOM has upside even given a 2008 to 2009 like fall in revenue, leaving room for additional upside if oil manages to rebound quicker than expected.
Quick and Dirty DCF Analysis
The quick and dirty discounted cash flow analysis models a specific case in which we’ve laid out below. This is not meant to be a prediction of the future by any means but meant to be an interesting baseline given negative assumptions.
- We assume company’s revenue will decline 29% next year, and 5% the year after, taking revenues beneath Financial Crisis lows to $294 billion before a bounce and returning to a more normal growth rate. The growth we assume won’t take the company past 2011 revenue of $480 billion till year 10.
- We use reported debt of approximately $22 billion, plus the pension liability of $20 billion.
- We assume convergence to target Pre-Tax Margin of 15%,which is below 10 year margin.
- We assume Tax rate of 40%.
Current Share Price Represents Almost 15% discount to Quick and Dirty Model
Current market price of $93.36 (12/29/2014) represents near 15% discount to model value for Exxon Mobil of $109.07. As with any DCF model or any model for that story, it’s garbage in, garbage out, but this may even prove to be conservative given the nature of the projections.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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