STOCK WATCH


ExxonMobil: Super-Safe Stock

Shares of this oil giant provide strong and stable returns and are less risky, by some measures, than Treasury inflation-protected securities.



Latecomers to the oil-price rally may figure it's too late to get in on the action. At $134, the price of a barrel of crude has doubled over the past year, and it's up 40% since January 1. Skeptics are even suggesting that energy investments are a bubble ready to pop.

Curiously, shares of the world's largest non-governmental oil company, ExxonMobil, are anything but bubble-ish. At a price of $84.91 at the close of trading on June 20, they've actually lost ground this year, down from $93 on January 2. They trade for nine times this year's expected earnings of $9.14 per share, near the low end of their historical range of price-earnings ratios.

No need to fret about the sagging stock. ExxonMobil (symbol XOM) is hardly a company in trouble, but rather one that, by general agreement, is extremely well managed. It has reported record profits for two straight calendar years and followed that up with record earnings in the first quarter of 2008: $10.9 billion on a staggering $116.9 billion of revenue.

The Irving, Texas-based giant faces some head winds, for sure. It is so big that its primary competitors are governments of oil-rich nations, which control about 80% of the world's oil-and-gas reserves. Many of them are less willing than in the past to partner with Exxon and share the profits. Analysts are concerned that the company's production will decline by a few percentage points this year, although it should resume growing in 2009. And, of course, there's always the possibility that the price of oil is a bubble that will soon burst.

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Even so, Exxon looks like a reasonably priced bet on continued strength in oil prices. And if prices decline, Exxon shares' downside should be limited.

What appears to be depressing the stock currently are concerns that oil production this year -- expected to be about 4.3 million barrels per day -- will be flat or down slightly. That follows a 1% rise in production in 2007.

The reasons for the sluggish output are numerous, including production delays at new projects, declining output from maturing fields, difficulty finding a sufficient number of petroleum engineers, and the government of Venezuela's expropriation of oil properties last year. But Exxon has more than 60 new exploration and production projects that are scheduled to come on line by 2012, and growth should return by next year. The company says new projects could add the equivalent of 1.5 million barrels of oil per day in new production by 2015.

More importantly, Exxon's size and economies of scale allow it to squeeze out more profits per barrel than any of its competitors. In the first quarter, Exxon realized an average of $93 in revenue for each barrel of oil it produced. Standard & Poor's estimates Exxon's acquisition cost at 56 cents per barrel and an average finding-and-development cost of $7 per barrel, both below the industry average.

The company generates prodigious amounts of cash -- more than $50 billion from operations last year alone. Yes, the past year's extraordinary rise in oil prices has boosted cash flow significantly, but Argus Securities analyst Philip Weiss points out that the company has averaged $11 billion in quarterly operating cash flow since 2004, well before the recent run-up.

After plowing $21 billion of that cash back into exploration and production projects last year, the company essentially gave the rest of it back to shareholders. It spent $28 billion repurchasing shares (the company has bought back 20% of its shares in the past five years), and this year it raised its annual dividend by 14%, to $1.60 a share. At the current share price, the stock yields 1.8%.

Even after all that, the company still has $41 billion -- nearly $8 per share -- of cash on its books. In a downturn, when the prices of new properties and projects come back to earth, Exxon can go on a nice buying spree, if it wants to. Some analysts suggest that the company is husbanding some of its cash just for that purpose.

Meanwhile, between the share buybacks (which boost earnings per share for current shareholders) and the dividend, Weiss estimates that Exxon investors are getting a 9% return on their investment, even if the share price doesn't budge. That's more than double the 4.2% yield of ten-year Treasury notes.

Exxon shares are riskier than government bonds, of course, but perhaps not as much as you'd think. In a report last month, analyst Kurt Wulff, of research firm McDep LLC, compared Exxon shares with Treasury inflation-protected securities and concluded that the "lagging inflation adjustment and high taxation [of TIPS] are driving us to believe that a[n] ... investment in the world's leading corporation is 'safer.' "

Exxon, by the way, has only about $10 billion in debt, about a quarter of its cash reserve, and it is one of a handful of corporations with a top-shelf, triple-A credit rating.

Assuming a long-term price of $80 per barrel of oil and $11 per million British thermal units of natural gas (compared with $13 currently), Wulff calculates that Exxon shares are worth $102, about 20% above their current price.

Whether ExxonMobil hits that price sooner or later is almost beside the point. The company's market position is so dominant that its shares provide, year after year, a remarkably strong and stable return to investors. Over the past 19 years through March 31, Exxon's stock returned an annualized 15.1%, compared with an annualized 10.7% for Standard & Poor's 500-stock index.




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