Published by Bob Ciura on July 5th, 2017
Oil and gas is a cyclical industry, which is why there are only two energy stocks on the list of Dividend Aristocrats.
One of them is Exxon Mobil (XOM).
The Dividend Aristocrats are a group of 51 stocks in the S&P 500 Index, with 25+ years of consecutive dividend increases.
You can see the entire list of 51 Dividend Aristocrats here.
Despite operating in a boom-and-bust industry, Exxon Mobil has raised its dividend each year, for more than 30 years.
While so many other oil and gas companies cut their dividends over the past year, Exxon Mobil kept its dividend growth streak intact.
Investors can thank Exxon Mobil’s diversified business model and quality assets for this.
This article will discuss why Exxon Mobil stock could be a good choice for income investors, such as retirees.
Business Overview
Exxon Mobil is classified as an integrated oil and gas company, meaning it operates both upstream (exploration and production) and downstream (refining) businesses. It also has a large chemicals segment.
With a balanced business model across the oil and gas spectrum, Exxon Mobil is less volatile than independent exploration and production majors like ConocoPhillips (COP), which are much more sensitive to fluctuations in oil and gas prices.
Refining and chemicals operations tend to hold up much better than exploration and production activities, when commodity prices decline.
Exxon Mobil has a very high-quality business model, and generates industry-leading returns on capital.
Source: 2017 Analyst Meeting, page 4
Exxon Mobil’s upstream business lost $4.2 billion in 2016, but the refining segment earned a profit of $4.2 billion for the year. And, the chemicals business generated profit of $4.6 billion.
Still, Exxon Mobil’s upstream segment is its largest business, which means the company is not immune from falling commodity prices.
Exxon Mobil’s earnings-per-share declined 51% in 2016.
The good news is, oil and gas prices have recovered significantly off their 2016 lows. And, as the largest publicly-traded energy company in the world, Exxon Mobil has the ability to cut costs when necessary.
The company slashed capital expenditures by 38% in 2016, to maintain profitability.
Conditions have improved significantly to start 2017.
Exxon Mobil’s first-quarter revenue increased 30%, to $63.3 billion. Earnings-per-share more than doubled, to $0.95. The company beat analyst expectations for earnings-per-share last quarter, by $0.10.
Earnings benefited from improved commodity pricing, as well as cost cuts. Exxon Mobil cut capital spending by another 19% in the first quarter.
Going forward, a continued rise in oil and gas prices will fuel Exxon Mobil’s recovery, as will growth from new project start-ups.
Growth Prospects
The first potential growth catalyst for Exxon Mobil is higher oil and gas prices. With such a large upstream business, Exxon Mobil would benefit from any improvement in commodity pricing.
That said, oil and gas prices are far outside Exxon Mobil’s control. For that reason, investors should focus more on the things Exxon Mobil can control, primarily its lineup of new projects.
This is an area that should excite investors, because Exxon Mobil has a large number of new projects set to ramp up over the next few years.
In fact, Exxon Mobil has more than 100 projects currently in development, 18 of which are in the executions stage.
Source: 2017 Analyst Meeting, page 17
One of the most important new projects for Exxon Mobil is its Papua New Guinea liquefied natural gas facility. The field produces approximately 7.9 million tons of LNG per year.
Another emerging area of growth for the company is Mozambique.
In the first quarter this year, Exxon Mobil purchased a 25% interest in the Area 4 gas field in Mozambique, from Italian oil giant Eni (E), for $2.8 billion.
There have been six major discoveries at Area 4 thus far, with 85 trillion cubic-feet of gas in place.
Source: 2017 Analyst Meeting, page 23
Bringing new projects online will help Exxon Mobil in two ways.
First, they will no longer require nearly as much capital investment, which will help Exxon Mobil’s bottom line.
In addition, they will begin generating cash flow of their own.
This will result in a meaningful increase in production over the next few years.
At its 2017 Analyst Meeting presentation, Exxon Mobil stated its annual production would rise to 4.0-4.4 million barrels per day by 2020.
This represents a roughly 5% increase from 2016 production levels.
Valuation & Expected Total Returns
Based on 2016 earnings-per-share of $1.88, Exxon Mobil trades for a price-to-earnings ratio of 43.7.
Considering the S&P 500 Index has an average price-to-earnings ratio of 25.7, Exxon Mobil shares appear to be significantly overvalued.
However, it is important to remember Exxon Mobil’s earnings were severely depressed last year, due to the industry downturn.
Exxon Mobil is widely expected to grow earnings-per-share in 2017. Analysts currently expect Exxon Mobil’s earnings-per-share to more than double in 2017.
In a more normalized commodity price environment, investors can reasonably expect Exxon Mobil to grow earnings-per-share by 6%-8% per year, over the long term.
Along with cost cuts and share repurchases, Exxon Mobil’s future returns could be as follows:
- 6%-8% earnings-per-share growth
- 1% share repurchases
- 3.8% dividend yield
Based on these assumptions, Exxon Mobil could generate annualized returns of roughly 11%-13% moving forward.
Exxon Mobil’s dividend yield will make up a significant portion of its future total returns.
Importantly, Exxon Mobil’s dividend appears to be secure.
The company currently has a dividend payout of $3.08 per share. This represents a 3.8% dividend yield, based on Exxon Mobil’s July 3rd closing share price of $82.10.
Analysts expect Exxon Mobil to earn $4.05 per share in 2017. This would more than cover the annual dividend payout.
And, assuming earnings-per-share continues to grow in 2018, there is room for another modest dividend increase next year.
Final Thoughts
Exxon Mobil is a blue-chip oil stock. It is one of 49 stocks with a dividend yield of at least 3%, along with more than 100 years of dividend payments.
You can see the entire list of 49 blue-chip dividend stocks by clicking here.
The company has suffered from weak oil and gas prices, alongside the entire industry.
That said, things are looking up. New projects, and any continued recovery in commodity prices, will help return Exxon Mobil to growth.
In the meantime, its high dividend yield and long history of dividend growth, make Exxon Mobil a top-quality oil and gas stock.
