ExxonMobil is a Bargain

Big integrated oil companies are traditionally considered the most defensive plays in the energy sector. Companies like ExxonMobil Corp (NYSE: XOM) are less volatile than the S&P 500, offer above-average dividend yields and have a history of performing well even amid weak commodity prices.

Elliott Gue – The Energy Strategist

The overall stock market remains in a funk, down 5% for the year, despite record-low interest rates. The best performing sectors have been an odd mix of conservative income investments such as U.S. government bonds, REITs and MLPs on the one hand and speculative Internet, biotech, and precious metals stocks on the other.

By contrast, energy stocks (other than MLPs, bless them!) have lagged badly as oil and natural gas prices remain depressed, and investors fear higher regulatory costs in the wake of the BP oil spill.

Energy Stocks are a Buy

The result is that most energy stocks are dirt cheap. Elliott Gue, editor of The Energy Strategist investment service, thinks that now is a great time to take advantage of these temporary bargain stock prices. He recently wrote an article for subscribers entitled “Energy Value Plays” in which he pounds the table for “integrated” energy companies – companies that engage in both upstream (exploration and production) and downstream (refining and marketing) businesses. Elliott’s bottom line:

The outlook for upstream operations remains solid, while the bar of expectations for refining remains low despite signs of improving fundamentals. Shares of many Big Oils trade at below-average valuations and represent a great buying opportunity.

Integrated oil companies benefit from diversified operations so their profits aren’t solely dependent on high oil prices. In fact, refining profit margins often increase during downturns in oil prices. Still, most integrated oil companies make three-quarters of their money from upstream operations. So I was glad to hear that Elliott is calling for oil prices to rebound to $100 per barrel by the end of this year. In fact, Elliott is calling for oil to retest its all-time high price of $150 per barrel sometime next year! 

Special Event You Don’t Want to Miss

On September 22^nd Elliott is hosting an exclusive web-based conference call LIVE to discuss his bullish oil price forecast. This rare chance to learn from one of the nation’s most prominent energy stock strategists promises to be an information-packed and profitable event. After offering up his seven favorite energy stocks to benefit from the upcoming oil boom, he’ll also have a Q&A session at the end of this one-time presentation to answer any questions you may have. Mark your calendars and click here for more details.

ExxonMobil

Here’s a hint: Elliott likes ExxonMobil.  The largest stock in America is also one of the cheapest.  It’s down more than 11% this year despite strong fundamentals, a rock-solid balance sheet, and a 3% dividend yield. In The Energy Strategist, Elliott recently explained to subscribers his love for ExxonMobil’s financial strength and profitability:

ExxonMobil is the largest of the integrated oils based on market capitalization, enterprise value and daily production in oil-equivalent terms. The company also has a well-deserved reputation for quality and stability; ExxonMobil has no net debt as well as a coveted, and increasingly rare, “AAA” credit rating from Standard & Poor’s.

ExxonMobil is also noted for its commitment to profitability and long-term value. Case in point: Its 2009 return on assets was 8.4 percent, and its return on equity was 17.3 percent — tied for the lead among the Super Oils. 

According to Elliott, ExxonMobil’s stock price (currently around $60) has been unjustifiably beaten down because of a recent acquisition:

In light of its attractive asset base and operating excellence, the obvious question is why Exxon has underperformed peers in recent months. The main reason for this weakness represents a source of future strength: The oil giant’s acquisition of US-focused natural gas producer XTO Energy. Investors appear concerned that ExxonMobil might have paid too much for XTO, while some have expressed concerns that the new assets increase the profile of natural gas in Super Oil’s production mix.

The market has vastly overreacted to both concerns, furnishing savvy investors with an excellent opportunity to buy ExxonMobil’s shares. With gas prices depressed in late 2009 and sentiment weak, ExxonMobil wasn’t exactly buying into the industry at the height of euphoria — the deal is a value play on a business that will be of increasing strategic performance down the line. And there’s plenty to like about XTO Energy’s business model. XTO has a long history of operating in the Barnett and Haynesville Shale and brings a lot of know-how to the table, a valuable asset as ExxonMobil seeks to exploit the significant unconventional natural gas acreage it has amassed both in the U.S. and internationally.

Source: Bloomberg

Bill Miller’s “Once in a Lifetime Opportunity” Involves ExxonMobil

Elliott is not alone in appreciating ExxonMobil’s bargain price. Great investing minds think alike! Bill Miller, portfolio manager of Legg Mason Value C (LMVTX), is famous for having beaten the S&P 500 for 15 consecutive years (1991-2005). He hasn’t done well since 2005 (more like horrendous), but he still commands respect. Anyway, in a July market commentary to Legg Mason fund shareholders, Miller made an interesting statement. He said that large-cap U.S. stocks:

represent a once in a lifetime opportunity to buy the best quality companies in the world at bargain prices. The last time they were this cheap relative to bonds was 1951.

Wow! Now that’s what I call an attention grabber. Guess which large-cap U.S. stock he singled out as his favorite way to play this “once-in-a-lifetime investment opportunity?” That’s right, he likes ExxonMobil:

A few weeks ago I sent a little note to our staff about Exxon Mobil. It pointed out that Exxon Mobil was on the 52 week low list, and was actually lower than it was during the depths of the panic in the fall of 2008. It had (and still has) a yield greater than the 10 year treasury, trades at a multiple well below the market, has returns on capital above the market, has grown the dividend over 9% per year the past 5 years, and uses its prodigious free cash flow to shrink its shares outstanding by between 300 and 400 million shares per year.

If it keeps this up for the next 15 years, it will be just about out of shares. Yet it languishes at 5 year lows. When it was last trading here in 2005 oil was $50 a barrel.

The math is fairly simple: a sum of the dividend yield, growth rate and share shrink could represent an attractive annual return even if the valuation stays the same, and the valuation is among the lowest the company has traded at in years.

Exxon Mobil is one of the highest quality companies in the world, yet no one seems to care.

For value and contrarian investors, this sounds like a call to action.

Disclosure: Jim Fink owns shares of ExxonMobil.