By Stephanie Anderson Forest
The year-long rally in crude oil and natural gas prices has been a gusher for the oil patch. The biggest winner is ExxonMobil (XOM ), the world's largest publicly traded energy company. Along with improvement in its refining and chemicals businesses and robust returns from global exploration and production, soaring energy prices helped the Irving (Tex.) oil giant rack up 2003 earnings of $21.5 billion, the largest of any U.S. corporation. Little wonder it came in at No. 23 on BusinessWeek's 2004 ranking of the nation's top-performing companies.
Year-to-date, ExxonMobil's shares are down 2%, on par with the performance of the Standard & Poor's 500-stock index. Part of the decline can also be blamed on the hit that shares of the major oil concerns, including BP (BP ) and ChevronTexaco (CVX ), have taken since Royal Dutch/Shell's (RD ) January disclosure that it had substantially overstated oil and gas reserves. Although ExxonMobil has long been viewed as having the industry's most conservative reserve-booking policy, the revelation is casting a pall over the sector.
IMMUNE TO CYCLES?
Still, many observers see a buying opportunity: 13 of 25 analysts surveyed by Thomson/First Call rate ExxonMobil's stock a buy or a strong buy, with a median price target of $44. Others, like S&P's Tina J. Vital and Jacques Rousseau of Friedman Billings Ramsey, are more optimistic. Both have a 12-month target of $50, despite the industry consensus that energy prices are headed for a fall in coming months.
"ExxonMobil is a unique stock in that its earnings over a long period of time seem to be immune to commodity prices and economic cycles," says Vital. "ExxonMobil is a safe haven, a solid investment." She notes that over the past decade, ExxonMobil has generated a 13.3% annual total return, compared to S&P's 11.4%.
Many forecasters had looked for oil prices to fall sharply after the Iraqi war, but lingering hostilities in the country, the potential for more supply disruptions in Venezuela, rising demand from China and the U.S., and OPEC's deft management of production have kept crude prices stubbornly high. Hovering around $37 a barrel, oil is about 20% higher than it was before the Iraqi war. In the meantime, natural gas is selling for about $5.50 per million BTUs, compared to $5 a year ago. But for 2004, Wall Street's consensus is for crude to average $28 a barrel and natural gas to average about $4.70 per million BTUs.
NO WIPE OUT.
While those kinds of price drops could hamper many small and midtier players, analysts say that's not the case for ExxonMobil and most of the integrated supermajors. ExxonMobil wouldn't escape big commodity price fluctuations unscathed, but "it would hurt them a lot less than anyone else in the sector," says analyst Fadel Gheit of Oppenheimer. "If oil, for example, drops 30%, ExxonMobil's earnings might drop 10%, but many others' [earnings] could be wiped out."
Gheit and others say ExxonMobil will cope better with lower prices than its rivals because its diversity, financial strength, and industry-leading returns set it apart from its peers. The largest and most profitable integrated oil and gas company, ExxonMobil is "undeniably the leader of the pack," says analyst Bruce Lanni of A.G. Edwards & Sons.
For one, its balance of oil and gas exploration and production, refining, and marketing, and its chemicals businesses offer a hedge against falling oil and natural gas prices. Its refining business helps shield ExxonMobil from dropping crude prices. For every barrel of oil it produces, it sells about three barrels of refined products. In addition, its geographically diversified asset base -- which includes conducting business in 200 countries -- mitigates geopolitical and economic risks.
A strong balance sheet gives ExxonMobil financial flexibility to invest in all aspects of its businesses as well as reward shareholders. Strong earnings and cash flow allowed it to build a cash balance of some $10.6 billion at the end of 2003 vs. debt of $9.6 billion. In 2003, it returned $11.5 billion in cash to shareholders through stock repurchases and dividend payouts.
Since 1999, the year Exxon and Mobil merged, it has returned $47 billion to shareholders. Analyst Rousseau expects ExxonMobil to continue its stock-buyback program at an annual rate of $6 billion. Its dividend-paying history isn't too shabby either: ExxonMobil has increased its annual dividend for 21 consecutive years at an average annual rate of 4.7%, exceeding inflation as measured by the government's consumer price index at 3.1%.
Analysts say ExxonMobil also consistently generates the highest return on capital employed, the industry's leading performance indicator. Over the last three-year period (2001-03), ExxonMobil's average ROCE was around 18%, vs. 14% for Royal Dutch/Shell, 12% at ChevronTexaco, and 10% for BP. "We expect ExxonMobil to continue its efforts of boosting shareholder returns via dividends and share repurchases, while continuing to widen the ROCE lead over its peers," says Rousseau.
"A BIG CHALLENGE."
The oil giant looks especially appealing to some as it inches closer to boosting annual production, the major chink in its armor. With output rates declining in oil and gas fields in recent years, ExxonMobil has had a hard time expanding production, which fell 1% in 2003. Analyst Lanni, says even if ExxonMobil's production climbs 1% in 2004, volumes will still be below 1998 levels, despite the start of 66 major projects over the last five years.
Longer term, analysts say, ExxonMobil is expected to hike annual oil and gas production by about 3%, driven by projects in areas such as West Africa, the Caspian, Russia, and the Middle East.
"Maintaining their upstream [production] growth is a big challenge, but it's not something that's unique to ExxonMobil. We're seeing that all across the sector," says S&P's Vital. However, she says, "the size and [production] contribution of [ExxonMobil's] projects will really pick up after 2005." For investors who want a stake in the energy business, ExxonMobil stock seems to have some upside potential left.
Forest is a correspondent in BusinessWeek's Dallas bureau