Exxon Mobil's viability as a portfolio investment opportunity

Exxon Mobil

The global energy demand continues to increase at an extraordinary rate. The world's energy producers are challenged to increase capacity to support a growing demand. As the global population increases, the demand for energy increases as a result. Given this market scenario, the energy sector appears to be an excellent prospect for increasing portfolios. However, the industry is also faced with the challenge of supplying global energy needs, while doing so with an increasing concern for the environment. Green concerns headline news about the energy sector. This research will explore the recent history of the energy sector and the feasibility of ExxonMobil as an addition to a balanced portfolio.

Description of Company

The ExxonMobil Corporation is a longstanding leader in the exploration, production, transportation, and sale of crude oil and natural gas products. It is also involved in the manufacture, transportation and sale of petroleum products and petrochemicals. These products include olefins, aromatics, polyethylene, and polypropylene plastics. In addition to these products and services, ExxonMobil is also involved in electrical power generation. Exxon's products are diverse, but concentrated on crude and crude products. Their ability to increase capacity to meet demands depends heavily on the success of their exploration efforts. ExxonMobil makes an effort to meet increasing energy needs in a manner that is friendly to the environment. Their philosophy demonstrates a deep concern for the communities that they serve and the larger global community.

Focus on the Future

New technologies allow producers to access a greater percentage of the available energy resources than in the past. The energy industry is dependent on the ability to establish an economy of scale. Those that have the resources to increase production and to explore for new sources emerge as leaders. Those that do not have the resources to compete on a larger scale must be satisfied with lower producing wells. The ability to develop and economy of scale also means access to prime locations. This industry is stratified according to economic scale. There are those that are very large, such as BP, ExxonMobil, and Marathon that compete on an entirely different scale than smaller companies.

One of the keys to understanding the energy industry is that its business cycles speaks in terms of decades, rather than years (Tillerson, 2007). This is the length of time that it takes to obtain new acreage, to explore, and bring new sources into production. Policy makers often want immediate results from the energy industry, causing them to set policies that are not achievable. Investment in the energy sector is a long-term growth proposition. One cannot expect to make considerable money in a short time. The energy sector is an excellent example of a long-term growth stock due to the length of their business cycle. The focus of investing in the energy sector are only for those with a long-term perspective.

Oil is one of the most heavily traded commodities in the world. The oil industry does respond to short-term signals, but its primary focus is on supplying future needs. The ability of the energy sector to supply the world's needs in the future depends on the ability to make projections about future demand far into the future. This is a difficult task for any industry, but the oil and gas industry have become accustomed to speaking in terms of these long-term projections. The accuracy of these projections presents a certain degree of risk and uncertainty. There is not way to predict the future for certain, and a mistake could cost the industry the ability to meet future demand.

Estimates of future energy needs vary. According to ExxonMobil's estimates, the global energy demand is expected to be 40% higher in the year 2030 than it is today (Tillerson, 2007). This will amount to nearly 325 million barrels a day (Tillerson, 2007). This growing demand presents many challenges, but it also presents many opportunities for the long-term investor. Few industries can expect such an attractive increase in demand as the oil industry. This economic growth in the oil industry will fuel other portions of the global economy. Growth in the overall economy means that consumers will have the ability to purchase these new production levels.

Oil and gas now come from a diverse array of producers from all over the world. Estimates are that the earth has more than enough resources to meet the growing demand. Total resources are estimated to include more than 3 trillion barrels of conventional oil (Tillerson, 2007). This estimate continues to grow as new technological advances make it possible to reach reserves that were inaccessible in the past. This is one of the few industries where both supply and demand are expected to grow at an enormous rate in the future.

In the past, the energy sector was dominated by a few key producers, located in only a handful of oil producing countries. This market structure allowed these producers to have almost complete control over production and price. Oil and gas are a necessary commodity, which in the past, has allowed it to be used as a political tool to advance one's own agenda. However, this marketplace has changed and the number of oil producing countries has increased. These changes make the oil industry operate like other market segments. Oil can no longer be used as a political battleground. If one supplier refuses to provide, one only has to turn to another supplier. There will be increasing chances for supplier substitution in the future.

Financial Analysis of ExxonMobil

Mission Statement

The Mission Statement of investment prospects can provide important information on where the company intends to go in the future. ExxonMobil's mission statement states,

Exxon Mobil Corporation is committed to being the world's premier petroleum and petrochemical company. To that end, we must continuously achieve superior financial and operating results while adhering to the highest standards of business conduct. These unwavering expectations provide the foundation for our commitments to those with whom we interact: " (JLP, 2005).

Financial Goals

ExxonMobil does not explicitly state its financial goals. This is proprietary information that is not published. However, ExxonMobil does suggest that it intends to keep up with global demand. ExxonMobil is focused on long-term growth, rather than short-term gains. One could expect the financial goals of the company to include a plan for long-term steady growth that keeps pace with global demand.

Financial Analysis

Exxon Mobil is traded on the New York Stock Exchange under the stock ticker XOM. XOM ended the day on January 28, 2008 with a closing price of 85.08. It is expected that this price will climb to 101.00 within one year (Yahoo Finance, 2008). It is a high volume stock, in terms of the number of trades. It has a healthy 6.92 Earnings Per Share and a Market Cap of 464.85Billion (Yahoo Finance, 2008). XOM pays a dividend of $1.40 that has experienced a growth rate of 1.70%. (Yahoo Finance, 2008). XOM has a P/E of 12.30. These financials, combined with a positive growth prospect for the long-term future would make XOM appear to be a winner for portfolio growth.

When one compares financial ratios to the Industry, sector and S & P. 500, one can get better picture of how ExxonMobil compares. When one compares the P/E ratio, XOM performs slightly better than the industry average. However, over the past five years, the P/E ration has demonstrated a range from 10.40 to 23.36 (Reuters, 2008). The industry and sector out performed XOM, but this is largely due to the long-term nature of some of ExxonMobil's projects.

XOM has a beta of 0.87, compared to 0.75 for the industry. This beta reflects a comparison with the S & P. 500, rather than the DOW (Reuters, 2008). This is a relatively steady stock that closely follows the S & P. 500, but it could not be considered a tracking stock. Price to sales hovers at 1.23. This is higher that the industry, but lower than the S&P 500.

Gross sales were down -2.33 compared to the previous 12 months. However, the industry was down by -3.72. This is largely a result of rising oil prices resulting in curbed consumer spending. It is a reflection of a downturn in the general economy. This trend may continue for some time, but will once again recover at some time in the future. This short-range downturn does not reflect long-term performance. XOM has demonstrated a 12.16% growth rate over the past five years (Reuters, 2008).

XOM has demonstrated a 5-year Earnings per Share growth rate of 25.08 (Reuters, 2008). This is slightly lower than industry standards. However, this reflects the effects of capital expenditures on exploration efforts. Five-year capital spending on new projects and exploration has also increased a healthy 9.13%. Although this expenditure represents a short-term liability and decreased profits, it also demonstrates ExxonMobil's commitment to long-term growth. The oil and gas industry are characterized by high capital expenditures related to expansion. This is an ongoing process in this industry.

The real question is not how much they are spending on expansion efforts, but rather if they are seeing a return on their investment. XOM has a long standing reputation for maintaining long-term value by realizing a healthy Return on Assets, Return on Investments, and Return on Equity. Over the past five years, Yom's average Return on Assets was 14.58. Its average Return on Investment was 19.14 and its Return on Equity was a healthy 28.23 (Reuters, 2008). These numbers demonstrate that XOM realizes a healthy return on its expenditures. It meets its goal of preserving shareholder equity and continuing to offer value to its investors.

Inventory turnover and asset turnover have longer cycles than the average S & P. 500 stock. This is due to the processes involved in the production of crude. One of the most attractive aspects of XOM is that although capital expenditures are high, it retains a low Long-Term Debt to Equity ration of 0.06. It has a current ration of 1.52, compared to 1.36 for the industry (Reuters, 2008).

As far as investment opportunities are concerned, ExxonMobil has many challenges ahead of it, as the industry prepares to meet global energy needs. However, ExxonMobil is a leader and has an established economy of scale, compared to many other producers. It has healthy financials. The recent downturn that it has experienced is not expected to effect long-term prospects. One of the most attractive aspects of XOM is that it provides investors with a source of income through dividends.

ExxonMobil will not be a stock that will provide quick returns. It is more suitable to the long-term investor that wishes for a small amount of income, against sustained growth. ExxonMobil is faced with the same challenges and opportunities as others in the industry. ExxonMobil has the right set of credentials that would lead one to consider it to be a perfect long-term prospect for the growth portfolio.