Global warming has been a tremendous obstacle for the oil & gas industry. Much effort has been dedicated to hush the hype and avoid the passage of adverse legislation. The fear is that an individual aware of environmental damages can have due to fossil fuels, has the potential to bring down an entire industry through a change in habits. That may be true, but the bottom line will always be whether there are enough resources to feed the rising demand for fossil fuels. Hence, the decision taken by Exxon Mobil (NYSE:XOM) to make public the risks associated with stricter limits on carbon emissions is not expected to have a great impact on potential investors. After all, there are enough proven reserves of oil to guarantee a long-term investment. But, is this the right time to make an investment in the firm?
Declining Overall Performance and Response
In the last report published, Chairman Rex W. Tillerson said, “ExxonMobil delivered strong business results in 2013 while remaining focused on improving profitability and long-term shareholder value.” Nonetheless, the figures published in the same report do not paint a so bright performance. When compared year-over-year, fourth quarter 2013 earnings were down 16%, while full-year 2013 earnings were down 27% from 2012. However, shareholders were rewarded with $26 billion in dividends and share purchases policy.
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- XOM 15-Year Financial Data
- The intrinsic value of XOM
- Peter Lynch Chart of XOM
Exxon Mobil’s 2013 performance was complicated to be benevolent. Shareholders were rewarded with a dividend increment but earnings and earnings per share decline 13% and 16%, respectively. Consequently, debt levels have overtaken cash flow for the first time in four years, and debt reduction levels have stall. The context is further aggravated by a decline in revenues and net income for the second year in a row.
Management expects to counter this trend through capacity increments, efficiency improvements and new discoveries. So far, Exxon Mobil announced that production will reach record levels during 2014 as ten projects will add new capacity of 300,000 net oil equivalent barrels per day. At the same time, production at Damar Gas is expected to reach peak capacity at 200 million cubic feet of gas per day. Also, acreage increments at Utica Holdings will improve efficiency through separate agreements to enhance the U.S. oil and natural gas portfolio managed by XTO Energy Inc. Last, the expansion of its Singapore chemical production facility reinforced its long-term supply commitment to the fast-growing Asia-Pacific market.
In another effort to overturn current weak performances, Exxon Mobil completed the acquisition of Bakken acreage from Denbury and the acquisition of Celtic Exploration. The integration of those businesses should be smooth given the track record held by the company, guaranteeing a superior return on capital employed. Most importantly, management has allotted about $185 billion for the investment program, to improve 21 oil and gas projects over the next five years.
Geographical diversification is a strong characteristic boast by Exxon Mobil. However, objectives differ by region. In the U.S., Canada, Kazakhstan, West Africa, Australia, Russia, Angola and Iraq, the company will aim at producing greater volumes. Meanwhile, exploration for unconventional natural gas will be conducted in North America and Gulf of Mexico.
Trading at 12.8 times its trailing earnings, Exxon Mobil’s stock carries a 24% premium to the industry average. Donald Yacktman (Trades, Portfolio) is the example of a long-term investment on the company. And through 2013 his position has risen considerably, although it is far from Buffett’s newer and leading position. Their confidence on the company’s performance is admirable given the recent declining overall performance, especially when they are in the market stocks with a more tempting yield. Therefore, taking a position on Exxon Mobil is not recommendable at this point in time.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.