Cash-rich Exxon poised to grow

1/5/2009


  Recent Price
$78
  Dividend
$1.60
  Yield

2.1%

  P/E Ratio
8
  Shares (millions)
5,160
  Long-Term Debt as % of Capital
6%
  52-Week Price Range
$96.12 - $56.51

Should the federal government run out of money, it could ask Exxon Mobil ($78; XOM) for a bailout. The oil giant has $38.43 billion, or $7.45 per share, of cash — more than $120 for every man, woman, and child in America.

Exxon controls 6% of the world’s refining capacity, and its 2007 revenue of nearly $405 billion is more than the gross domestic product of about 150 countries, including Norway and Saudi Arabia.

Scale has its advantages. Exxon squeezes more profit from each barrel of oil than most competitors, earning more than a 30% return on invested capital in the four quarters ended September. And Exxon, with a fortified balance sheet (cash net of debt equal to 8% of total stock-market value) and AAA credit rating, represents a strong, safe play in the energy market. Exxon Mobil, yielding 2.1%, is a Long-Term Buy.

Business breakdown
The exploration & production business, benefiting from record fuel prices, grew earnings 63% and accounted for 78% of net income during the first nine months of 2008. The other segments, refining and marketing (15% of net income) and chemicals (7%), offer some insulation from volatile fuel prices, as lower oil prices tend to reduce input costs for both units.

Still, Exxon is irrevocably linked to oil prices, which currently languish near $40 per barrel. The U.S. Energy Information Administration expects global oil consumption to fall in both 2008 and 2009, marking the first two-year decline in three decades. But over the long term, demand for oil should rise. Despite current lows, the world runs on gasoline, a dependence likely to continue for at least another decade.

Not surprisingly, Exxon’s consensus earnings estimates have fallen dramatically in recent months. Wall Street expects profits of $6.29 per share in 2009, down 34% from expectations three months ago and 27% from estimated 2008 earnings. But investors need not worry that Exxon will scrap its business model to chase next year’s earnings. Oil-production projects can require a decade of planning, and Exxon is focused on the long haul.

The oil giant started up 12 major projects in 2008, with another seven planned for 2009 and 2010 and 40 more in the future. Exxon has discovered oil in a number of locations in West Africa, where Angola and Nigeria represent key growth drivers. The company owns interests in 13 million acres in West Africa. While Exxon has had trouble growing production in recent years, the current project pipeline should support growth averaging at least 2% a year through 2012.

Conclusion
The company returns billions of dollars to shareholders every year through stock buybacks and dividends. In the nine months ended September, Exxon repurchased $26.72 billion in stock and paid out $6.39 billion in dividends. Over the last eight years, the share count has declined 27%.

Exxon shares, down 17% for the year, trade at 12 times estimated 2009 earnings. An annual report for Exxon Mobil Corp. is available at 5959 Las Colinas Blvd, Irving, TX, 75039; (972) 444-1000; www.exxonmobil.com.


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