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Berkshire, ExxonMobil and a Valuation Tail

November 19, 2013 | About:
Bud Labitan

Bud Labitan

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Recently, Berkshire's portfolio shows a new position of 40.1 million shares valued at $3.4 billion in ExxonMobil (XOM). ExxonMobil is the largest of the vertically integrated oil companies. It is also the second largest publicly-traded corporation in the world by market cap and revenue. With a market value of $417 billion, ExxonMobil has longevity, and it pays a 2.7% dividend yield.

In his 2011 shareholder letter, Buffett wrote: “A century from now... ExxonMobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions...”

Recent investments in shale and natural gas production indicate that ExxonMobil will be earning cash for its shareholders for the next several decades. It has invested more in natural gas. ExxonMobil completed a $30 billion project to develop the world's largest natural gas field. This field is located in the Persian Gulf state of Qatar. It is expected to boost the company's gas production and make ExxonMobil the world's largest natural gas producer. The North Field is expected to contain 900 trillion feet of natural gas. ExxonMobil also agreed to a joint venture with Royal Dutch Shell and Chevron to construct a liquefied natural gas facility on Barrow Island off the coast of Australia. Chevron will own 50% of the facility while Shell and Exxon will each have 25%.

Exxon strengthened itself in Natural Gas by the acquisition of XTO Energy (shale). XTO has a strong hold in shale, including the Marcellus, Haynesville and the Bakken basins.

XTO drove a surge in U.S. fuel output by exploiting fracking. XTO Energy’s resource was reported to consist of 45 trillion cubic feet of gas. The XTO acquisition complimented Exxon’s presence in other shale areas such as the Piceance Basin in Colorado. The company has been producing natural gas from the basin for more than 50 years and it has a reported estimate of 1.5 trillion barrels of in-place oil shale resources.

So, What About an Estimate of ExxonMobil’s Stock Value?

ExxonMobil has created a sustainable competitive advantage that I did not appreciate prior to reading about Buffett and Berkshire’s recent investment.

If you do a simple one- or two-stage DCF valuation estimation based on 10 to 15 years, a big piece of value is missed. I argue that ExxonMobil has created a valuable advantage for itself and its shareholders that stretches the excess return period (years) to at least 20 years, and maybe more.

For the sake of simplicity and estimation, let’s take a look at the DCF estimate posted at Valupro.net

Is it reasonable? Did Buffett and Berkshire get a good bargain?

Find out here.

Here is one view to consider. For the sake of conservatism, we may drop the growth rate to 5% at their model. However, I argue that, in view of long-rage planning and investments in shale and natural gas, you may also conservatively extend the excess return period to 20 years. This would result in an estimated intrinsic value of about $135 per share.

If Buffett and Berkshire purchased XOM at an average cost of $85, they got a bargain of around 37% in a large business leader.

Over time, the world economies will demand more energy production. In consideration of ExxonMobil‘s added durable competitive advantages, the “yield on cost” of this investment may prove to be even more profitable.

Bud Labitan is the author and editor of “MOATS: The Competitive Advantages of Buffett & Munger Businesses.” Moats discusses the competitive advantages of 70 Berkshire Hathaway businesses and it is targeted towards business school students, investors and business managers. He is also the author of other books on investment decision framing and decision making. These include the “1988 Valuation of Coca-Cola,” “Price To Value,” “Valuations,” and “The Four Filters Invention of Warren Buffett and Charlie Munger.”


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