Exxon Mobil Weathers the Storm

Copyright © 2008, Greenwich Financial Management Inc., a registered investment advisor.

We had recommended recently (“Opportunity: Oil and Gas,” Jan. 22nd) to consider investment in large integrated oil companies with strong balance sheets. Of these, we had mentioned Exxon Mobil as “one of the best run.” Subsequently, on January 30th, Exxon released its earnings for 2008, and its performance validates its reputation for running a tight operation.

Exxon earned $45.2 billion for fiscal/calendar year 2008, better even than its 2007 results of $40.6 billion, which set a record for corporate earnings by a U.S.-based company.
Earnings for the fourth quarter of the year were $7.82 billion, down about one third from the $11.66 billion earned a year earlier; in per share terms, earnings fell from $2.13 to $1.55. The result moderately bettered median Wall Street expectations of $1.45 per share. Earnings in the fourth quarter were hurt not only by the decline in fossil fuel prices at all levels but also by the effects of Hurricanes Gustav and Ike.

During a conference call with investors, Exxon’s investor relations spokesman said, “These results reflect the strength of our business model.” As noted in a report in the New York Times (1/31/2009, p. B3), “More than any other oil company, managers at Exxon emphasize a strict attention to containing costs and are disciplined about their investments,” a discipline that has served the company well in the harsh cycles of the energy market.

Exxon has over $36 billion of cash or cash equivalents on its balance sheet. Short term assets overall of about $96 billion compares with short term liabilities of about $68 billion. The debt to equity ratio is a modest 8.2%. Three notable expressions of Exxon’s balance sheet strength: First, Exxon is increasing capital spending by 20% for 2009. Second, it is maintaining its buyback program for common shares, albeit with a slight cutback to $7 billion for Q1 2009 vs. $8 billion for Q4 2008. The buybacks, of course, increase demand for shares; they should (and do) reflect a view by management that shares are overall undervalued. Third, Exxon does not feel the pressure to lay off workers or shutter facilities, moves that that some of its competitors are making. Moreover, the financial strength creates at least the capacity for possible value additive acquisitions in at atmosphere where cash is king.

Here are some frequently used value measures as they apply to Exxon. The stock is trading at about 10.65 times the median Wall Street estimate for 2009 earnings and at 8.26 times trailing earnings. Its price to book value ratio is 3.11. Exxon shines in measures of management effectiveness; looking back at the last twelve months, return on assets measured 19.46% and return on equity, 40.23%.

Exxon Mobil (ticker: XOM, traded on NYSE, closing price 1/30/2009 of $76.24 per share) remains a buy.

Note: Clients advised by Greenwich Financial Management Inc. may hold long or short positions in securities mentioned in this article or in derivatives of those securities. The author of this report has no personal holdings or interest in the referenced investments and has received no compensation for providing the above research from any of the listed companies. The information is not sufficient by itself to make an investment decision. The suitability of such investments for particular individuals has not been assessed.

Andrew Szabo CFA is managing director of Greenwich Financial Management Inc., a registered investment advisor. Questions call 917-796-8500 or e-mail Szabo@GreenwichFinancial.com). For more information, please visit http://greenwichfinancial.com/.

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