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Exxon Mobil’s XOM diversified operations and strong focus on both upstream and downstream businesses have helped it to overcome several hurdles over the years, including the times when crude touched multi-year lows.
Exxon expects its earnings to grow 135% by 2025, if crude trades at $60 per barrel. The stock seems to be shareholder friendly, as the oil supermajor’s current dividend yield is the highest since 1997.
Exxon generates most of its earnings from upstream businesses. Excluding the impact of U.S. tax reform and impairments, the company generated $7.7 billion during 2017 – representing 50.6% of the total profit – from upstream activities. The company’s upstream operations, benefiting from the partial recovery in crude prices, are spread across the globe with majority volumes coming from Asia and the United States.
The company also has extensive downstream and chemical operations. These businesses consistently gave strong support to the company when the market witnessed weak crude pricing scenario especially in 2016. In 2017, Exxon Mobil generated $4.9 billion from downstream business and $4.2 billion from chemical activities.
Undervalued Oil Supermajor
We have employed a trailing 12-month Enterprise Multiple for determining the value of the supermajor. This is because oil energy players typically shoulder significant debt for investing in growth projects and EV includes debt for valuing a company or industry.
Enterprise Multiple = Enterprise Value (EV)/EBITDA
We calculate the current EV/EBITDA value for Exxon at 9.88, lower than the S&P 500 index’s 12.08. Although the stock’s current valuation is higher than its five-year median EV/ EBITDA of 6.80, the current value is significantly lower than its five-year high EV/EBITDA of 13.86, reflecting Exxon Mobil’s strong upside potential.
Lowest Debt to Capitalization Ratio
Debt to capitalization ratio measures a company’s debt load as a percentage of total capital. The ratio generally reflects the company’s debt utilization for financing projects. Firms should be careful of managing the proportion of debt since they have to repay principal and interest back to the lenders.
Among all the oil supermajors, the debt to capitalization ratio of Exxon is the lowest. Its ratio stands at 11.15, significantly lower than 41.89, 31.53 and 21.15 for BP p.l.c. BP, Royal Dutch Shell plc RDS.A and Chevron Corporation CVX, respectively.
Healthiest Free Cash Flow
Free cash flow is measured after deducting capital expenditures from net cash flow from operations. If a company’s free cash flow is positive, it signifies that the firm could fund capital spending from its operating cash flow. In other words, for financing capital projects, firms with positive free cash flow don’t have to rely heavily on debt.
Through 2017, Exxon generated $14.7 billion of free cash flow, up almost 148% from $5.9 billion in 2016.
We note that Exxon Mobil’s free cash flow was the highest among all the oil supermajors in 2016 especially when West Texas Intermediate (WTI) crude touched a historical low of $26.21 per barrel earlier that year. In 2016, Chevron and BP had reported negative free cash flow of $5.3 billion and $4.6 billion respectively. Free cash flow for Shell was only $571 million.
Dividend Yield Highest Since 1997
Exxon's current dividend yield is 4.2%, higher than S&P 500 index’s 1.8%. Also, our proprietary software shows that the stock’s dividend yield is the highest it's been since 1997. Notably, despite a few short-term fluctuations, Exxon's dividend yield has been trending upward since mid-2014 – when the market started witnessing freefall in crude. However, the chart of the S&P 500 index trends downward over the same time span.
Exxon has been rewarding shareholders with dividend hikes for 35 years in a row. It increased its dividend in the second-quarter of 2017, reflecting a quarterly dividend hike of 2.7%. Also, since 1999, when Exxon merged with Mobil, the company has managed to return more than $300 billion to shareholders.
Strongest Return on Capital
Owing to the diversified and huge scale of operations, Exxon has the strongest return on capital among all the oil supermajors. Per our proprietary model, the current trailing 12-month return on capital investment for Exxon stands at 7.07%, higher than the respective 5.58%, 4.23% and 2.91% for Shell, Chevron and BP.
Diversified operations, a strong balance sheet, and healthy free cash flow position the stock well. In fact, we believe Exxon Mobil shares have all the hallmarks of a defensive play, which is supported by its Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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