Top Energy Pick: Exxon Mobil

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Jan 12, 2015
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Although it's likely that oil prices will stay low for a considerable period, that does not mean you should avoid the sector altogether. In fact, now is the time to acquire top-quality companies at bargain prices, provided you have the time horizon to wait for the inevitable turnaround and a tolerance for volatility. Here is a company I especially like right now and we're adding it to the IWB Recommended List.

Exxon Mobil Corporation (NYSE: XOM)

Type: U.S. common stock
Symbol: XOM
Exchange: NYSE
Current price: $92.83 (figures in U.S. dollars)
Entry level: Market price
Target price: $100
Dividend: $2.76
Yield: 2.9%
Risk rating: Moderate risk
Recommended by: Michael Corcoran

The business: Exxon Mobil was founded in 1870 and is the largest integrated crude oil and natural gas company in the world. It operates globally and manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene, polypropylene plastics, and specialty products. As well, it transports and sells crude oil, natural gas, and petroleum products. The market cap exceeds $394 billion and return on capital employed (ROCE) this year is expected to be over 17%. Free cash flow before asset sales and share buybacks is expected to be over $6 billion.

Why we like it: XOM is an excellent stock to hold in a declining oil price environment due to its diversified business base. While lower oil prices may negatively affect the operations of its upstream business, the operations of its downstream refining and chemicals businesses benefit from low prices, offsetting the impact.

Furthermore, given the long-term nature of most of its operations, XOM is prepared for price fluctuations and does not undertake a new venture without anticipating and testing a variety of different economic and price scenarios in order to ensure a favorable return.

XOM is one of the best-run businesses in the energy sector. The key metric management uses to evaluate operations and run their business is ROCE, which measures profitability and efficiency. XOM consistently boasts the highest ROCE of any of the integrated energy firms, averaging nearly 23% from 2010-2012. That was 1,000 basis points higher than its closest competitor!

XOM has a huge resource base of 90 billion barrels of oil equivalent (boe), far greater than their proved reserves of 25 billion boe. The company has excellent exposure to the areas that offer the strongest growth in the future: heavy oil, shale oil, and liquid natural gas (LNG). An added benefit of most of these projects is that they are located in low-risk countries with stable political, legal, and regulatory regimes.

Nearly 50% of XOM's assets are long life production, meaning that maintenance capital expenses (capex) is in the low teens per barrel. The lower the maintenance capex for existing projects, the greater leeway the company has in capital allocation, freeing up funds for new projects, dividends, and share buybacks.

XOM is a regular purchaser of shares as well; buying back stock in every quarter since 2002. In the first nine months of 2014, XOM spent $9.9 billion purchasing over 100 million shares outstanding and will spend another $3 billion in the fourth quarter. Credit Suisse estimated in 2012 that XOM buybacks had created 5% of value annually for shareholders.

Risks: There is a possibility the company will be unable to replace reserves at reasonable prices. However, in the current low price environment, there is a high likelihood XOM will be able to purchase distressed assets at a discount.

Cash flow: The stock pays a quarterly dividend of $0.69 ($2.76 a year) for a yield of 2.9%. The company has paid uninterrupted dividends for more than 100 years and has a 31-year record of increasing dividends. Dividends have grown about 10% annually for the past decade.

Action now: The shares are a Buy at the current level. XOM closed on Friday at $92.83.

- end Michael Corcoran