Bong and Stock Analysis: Exxon Mobil Corporation

Exxon Mobil (Ticker symbol:  XOM) is the largest publicly traded international oil and gas company that uses technology and innovation to help meet the world’s growing energy needs.    An extensive history that spans more than 135 years began with the very first oil well found in Titusville, Pennsylvania.    The start of the original Standard Oil Company, a refining company, and then other similar types of companies, spawned acquisitions made over the years to grow the company with a wide variety of products throughout the world (Exxon Mobil).

Financial Leverage:

The following financial ratios illustrate the risk or leverage of the company over the past five years as calculated based on the balance sheet figures at Morningstar.com.   For 2017, the debt to asset ratio has decreased from .49 to .46.  The range of debt to equity for the sector of oil and gas is within 0.5 and 0.9 when crude oil prices trade between $50 and $70 a barrel, so Exxon Mobil is right in line with the sector as a whole (Market Watch). 

There is no record of preferred dividends having been paid during this time which would indicate that preferred shares are not part of the capital structure.  Bonds, however, are part of the long-term debt in the table below.  Since 2013 Exxon Mobil’s total liabilities percentage has been between 49% and 50%.  The long-term debt increased substantially within the 5-year period reviewed beginning in 2014, with annual trending increases of approximately 73%, 66%, and 48% through 2016.  In comparison, the interest coverage ratio (referenced in the prior table) shows a declining trend.  So as debt increased, the ratio, decreased.  Decreasing ratios could indicate problems when they approach low numbers like 2 or 3, but for Exxon Mobil, it is still showing that the interest commitment is being covered adequately. 

*in millions          Source:  Morningstar

During the oil downturn that began in 2014, Exxon increased its long-term debt from roughly $6.5 billion to $27.7 billion.  At the peak, however, long-term debt still only made up about 15% of its capital structure.  The added debt was used to support long-term capital investment plans and the company’s growing dividend (Fool.com). 

Parts of the long-term capital investment plans include fracking.  In the last 10 years, the process of “fracking” has become more widely used in North America, specifically in the U.S. which allowed for oil and gas production to grow rapidly.  The amount of time to turnover from the extraction to the end product was reduced considerably.  A simplified explanation of fracking is the process of injecting water or some other liquid and sand, through the use of hydraulics, into shale to cause the rock to fracture in order to force open the rock and release the oil or gas inside.

(Investopedia.com, 2018).  The Corporation anticipates several projects will come online over the next few years providing additional production capacity. Exxon Mobil’s cash flows are highly dependent on crude oil and natural gas prices. However, due to its financial strength, large, long-term capital expenditures are able to be made.  A large and diverse portfolio of development projects and exploration opportunities helps mitigate the overall political and technical risks of Exxon Mobil’s upstream segment and associated cash flow.  The risk associated with failure or delay of any single project would not have a significant impact on the Corporation’s liquidity or ability to generate sufficient cash flows for operations and its fixed commitments (Exxon Mobil).

The table below shows two of Exxon Mobil’s 14 corporate bonds available on the market at the time of this writing and available to view at: finra-markets.morningstar.com/BondCenter.  The information reflects the last price available for the day.  These bonds are part of the corporation’s long-term debt structure.

Original offerings of bonds are priced at the face value at maturity, usually $1000 par or 100%.  The first bond in the list is callable and, presuming the par value in this quote is $1000, the last price or “quote” for the first bond is $98.799 and would cost the buyer $987.99 per bond.  The calculation for the cost of the bond to purchase is 98.799 divided by 100 and multiplied by 1000 (par value).  The annual coupon interest payment is $31.76 and is calculated by using the same process, coupon amount of 3.176/100 x 1000 (par value).  For the second bond, presuming the same par value would be priced at $1004.40 to purchase with a $26.93 coupon payment per bond.  That is calculated by taking the price of 100.44 dividing by 100 and multiplying by 1000 par value (100.44/100 x 1000); the interest payment would be (2.693/100 x 1000).  The quote gives the yield-to-maturity (YTM) for the first bond transaction as 3.425.  To calculate the current yield of 3.22% (at this writing) divide the coupon rate by the price (3.176/98.799 x 100).  The current yield on the second bond is 2.68% (2.693/100.44 x 100).  The table below shows the calculated current yields and yields to maturity.  Since the information on the bonds at the website is fluid, the yields will fluctuate with every change in price.

The Yield-to-Maturity (YTM) is calculated to anticipate the total return expected on a bond if held to maturity and uses present value (from the time value of money concept)  in the calculation and the result is annualized.  To find the YTM, the MS Excel function for RATE was used below.  Notice that the YTM is greater than the current yield for the first bond that is trading below par and for the second bond, trading greater than par, the YTM is less than the current yield.

First Bond:      Second Bond:

These bonds are top rated, “high grade” quality bonds by the credit rating agencies of Moody’s and S & P.  As an investor wanting to purchase one of these bonds, I would choose the first bond with the YTM of 3.40%.  One reason is that it is yielding more than the risk-free rate for only a six year term.  As of this writing, that rate is 2.99% for the 10-year Treasury bond.  If I were to buy a 10-year Treasury bond, I would be locked into 2.99% for 10-years, unless of course I would choose to sell the bond—which in that case, if interest rates were higher than 2.99% prior to the maturity date, the price to sell would reflect the lack of demand for this bond.  This is 10-years without risk; 10-years backed by the full faith and credit of the U.S. Treasury.  In this comparison, I have the flexibility to own this corporate bond for a term that is 40% less and earn a rate that is 13.5% more.

The YTM is greater than the second bond by .82 percent.  The first bond is callable, which would add additional risk to the investor for reinvestment options.  At the time of maturity, interest rates could be lower and that is where the risk is.  There is six years to go and I am not too concerned about its call ability.  News outlets constantly report how interest rates are expected to rise, should that occur, the corporation will want to keep a lower rate than the market offers.  The company’s ability to meet its debt obligations is due to the way it has positioned itself to be able to carry on even if the price of oil drops to $40/barrel (Market Watch).  The company had been leveraged quite a bit more in the mid-to-late-2000s; so then when prices climbed at the pump, the profits were used to pay down the debt.  If the duration of the bond was longer, there would be a concern.

Stock Performance

The stock performance of Exxon Mobil in comparison with one of its main competitors, BP, is reviewed through their respective market ratios in the table below.  The shaded areas are not applicable since those ratios require current pricing for the calculation.

         ^{Source:  Morningstar.com}

Exxon Mobil has a history of consistency when it comes to the dividends payable to the shareholders.  For the three years stated, 2015 through 2017, the dividend increased 3.4% in 2016, 2.7% in 2017, and currently, 3.9%.  Those are substantial increases.  Remember too, as previously mentioned, added debt supports the company’s growing dividend.  The current book value per share for Exxon Mobil is $44.96 as compared to the closing price on the stock exchange of $77.64.  That gives the impression of strong, upward pricing for the stock.  The reality is that the oil and gas sector are sensitive areas of the market and recently have experienced broad swings in the market price pattern.  BP posted a book value per share in 2017 of $29.83 and the recent closing price of BP was $39.51– higher than the book value.  The book value is what the accounting department of a corporation states that the shares in the company are worth.  The earnings per share or EPS, breaks down the dollars of profit across all outstanding shares.  So in the case of Exxon Mobil, the current EPS is 5.44 which means for every share of stock outstanding, the company earned, or made a profit of $5.44.  BP on the other hand, has a current EPS of 2.58 or $2.58 of net income for each of the 3,342 shares outstanding.

A look at the P/E ratios, price to earnings, for Exxon Mobil and BP is where we find a close comparison.  The industry average is around 17.  The P/E ratio, current price divided by the EPS, is a price multiple that investors use when evaluating a stock.  The number represents how much the investor is paying for every dollar earned. So for Exxon Mobil’s P/E of 14.29, that means for every dollar earned by the company, the investor will pay $14.29.  Compare that with BP’s P/E of $13.14.  If the P/E ratio along with the EPS were the only ratios used, the better buy would be BP’s stock because a shareholder is paying less in comparison to Exxon Mobil for the company’s earnings.

Exxon Mobil’s stock has a current yield of 4.22% compared to BP’s current yield of 6.23%.  These figures vary slightly (if manually calculated with figures from the table) due to the timing of the updates posted to the respective websites.  Basically, the yield is calculated by dividing the dividend by the current price.  Since the price changes throughout a trading day, the yields will vary slightly.  Both yields are attractive with BP’s current yield being very attractive.  If an investor is looking for income greater than the risk-free rate on a 10 year Treasury bond, (which as previously mentioned is at 2.99%), he or she might be interested in Exxon Mobil stock with a yield of 4.22.  That would give the investor 41% more income; or if BP stock was chosen, a little over 100% greater income yield. 

The Gordon Growth Model calculation below places a required rate of return of 7.50% for an investor and uses the 52-week high of $89.30 as the expected price one year from now.  It calculates a market price of $40.76 for the stock.  A smart investor would likely not be interested in paying the current market price of $77.64 and walk away from the purchase since the intrinsic value as calculated shows that the stock is overvalued.  That calculated market price, however, does fall in line to the book value as stated from the Morningstar figures in the prior table.  See the calculation below.

Beta (β) as listed in the table of market ratios is a measure of a stock’s volatility when comparing to the entire market.  Taking a look at Exxon Mobil’s beta of .92 gives an indication that the stock has a tendency to be less risky than the market as a whole which is considered a beta of 1.0; BP has a beta of .32 and so a portfolio with either or both would be less risky than the market.  The return of the S & P 500 is estimated to be at 7.5% between 1926 and 2014.  This market return has been adjusted for inflation over that period of time.  It reflects the overall return of 500 companies that have large market capitalization.  If the above figures of the risk-free rate, beta, and the average return of the S & P 500 were to be applied to the Capital Asset Pricing Model calculation, the expected return for Exxon Mobil would be 7.14% with a risk premium of 4.51%.  The risk premium is the difference between the risk-free rate and the expected yield and is meant to compensate for the risk an investor takes beyond the risk-free rate.

The two charts below show historical pricing for the past 12 month period for Exxon Mobil and its competitor, BP. 

Exxon Mobil

^{Source:  YahooFinance}

BP

^{Source:  YahooFinance}

While the market pricing incremental intervals are the same on the right of the chart, the wider spacing between the numbers for BP adds intensity to the hills and valleys. 

The trending patterns are very similar with visible drops in the market price in early February, mid, to late May, August, and November.  Along with the drop in price, which indicates a sell-off, the bottom bar chart represents the volume of shares traded.  The charts for each are color coded to indicate buying or selling patterns—Green for buying and Red for selling.  The sell-off in February was due to disappointing earnings for the prior quarter and was experienced by both Exxon and its other competitors.  The same pattern throughout the year was all after earnings reports that missed the target.  Shareholders watch those indicators closely and react, right or wrong, to charts and news.  Some hold to different investment theories as to the stock market pricing such as the Random Walk Theory or the Efficient Market hypothesis.

Upon reviewing the two competitors side by side, I would have to say that I would feel more inclined to study and learn more about BP.  I would be concerned as an investor in Exxon Mobil with its high market price for the stock in comparison to BP and relative to its book value.  When the market price drops sharply, as the chart shows for 2018, it could be quite an emotional roller coaster ride. 

As previously stated Exxon Mobil’s credit rating is very good and is able to meet its obligations.  BP, since the 2010 Gulf oil spill, has been focused on strengthening the company.  As a result, BP’s stock has a bigger yield than Exxon Mobil, it’s priced much lower, and the ratios discussed are much more comfortable.  I have this nagging thought in my mind about how Exxon Mobil continues to pay a dividend to shareholders, increase the dividend, and uses borrowed money to do so.  I cannot, at this time, warm to a recommendation to purchase shares of Exxon Mobil at its current market price.  I think that while projects have been placed and readied to be brought online in the near future, perhaps there are too many projects in the pipeline, no pun intended.  It just seems the company may be spread too thin for the efficiency needed to increase shareholder wealth.  That may be too conservative a view for some.

BP is overvalued as well but if an investment in the oil and gas sector was desired, I would watch closely for the price to fall and consider an investment once the price matches or trades lower than the book value.

• Exxon Mobil. (n.d.). About Us. Retrieved from Exxon Mobil: https://corporate.exxonmobil.com/en/company/about-us
• Exxon Mobil. (n.d.). Investor reports. Retrieved from Exxon Mobil: https://cdn.exxonmobil.com/~/media/global/files/investor-reports/2018/2017-financial-statements.pdf
• FINRA. (n.d.). finra-markets.morningstar.com. Retrieved from http://finra-markets.morningstar.com/BondCenter/Results.jsp.
• Fool.com. (2018, November 24). How safe is Exxon Mobil and its 4% Dividend Yield? Retrieved from (https://www.fool.com/investing/2018/11/24/how-safe-is-exxonmobil-and-its-4-dividend-yield.aspx
• Investopedia.com. (2018, September 6). Common debt-to-equity ratios for oil and gas companies. Retrieved from https://www.investopedia.com/ask/answers/060315/what-debt-equity-ratio-common-oil-and-gas.asp
• Market Watch. (n.d.). Retrieved from Market Watch: https://www.marketwatch.com/investing/stock/xom/profile
• Yahoo Finance. (n.d.). Exxon Mobil Corporation. Retrieved from https://finance.yahoo.com/quote/XOM/key-statistics?p=XOM