What's wrong with Exxon Mobil?

The oil colossus keeps churning, but returns have been lagging.

By InvestorPlace Apr 11, 2012 10:08AM

By James Brumley

 

Think all large-cap oil stocks are the same? Think again.

 

Exxon Mobil (XOM) might look like BP (BP), Chevron (CVX) and ConocoPhillips (COP) on the surface. When you look under the hood, though, there's something different about Exxon Mobil that might motivate you to steer clear.

 

Birds of a feather not flocking together

First, investor returns have been oddly varied from one of these stocks to the next. During the past three years -- the span of the economic recovery -- ConocoPhillips shares have advanced a little more than 100%, while Chevron is up 70%. Yet Exxon Mobil shares have gained just 23%. That's only a tad better than the performance of BP -- you know, the $136 billion company that created more than a $20 billion liability for itself by spilling nearly 5 million gallons of crude oil into the Gulf of Mexico in early 2010?

 

Think about that for a second. Exxon Mobil, which didn't create the worst environmental disaster in more than a decade, has rewarded investors almost as poorly as the company that did.

 

At the heart of the stock's stagnation is tepid earnings growth. Though Exxon Mobil's bottom line of $41.0 billion last year was better than 2009's $19.3 billion, it was still shy of 2008's net income of $45.2 billion -- the only one of the four major oil names in focus to do worse last year than it did in 2008.

 

And here's the amazing (again, not in a good way) part about Exxon's returns over the past three years: The company was buying back a truckload of shares during that time, which should have significantly helped the stock's value and earnings. It didn't. Although XOM has bought back $52 billion worth of its own stock since 2009 -- about 13% of the current $395 billion market cap -- last year's per-share profit of $8.42 still is weaker than 2008's $8.66.

 

Why can't Exxon do what the other major players seem to be able to do?

 

The hard part about hating it

Performance numbers aside, the company seems attractive. Exxon invests a great deal of money back into its business. Indeed, it has budgeted $185 billion for exploration and development over the next five years. That's huge -- huge enough to increase the company's output by an estimated 1 million barrels of crude per day. The raised output will translate into a little more than $36 billion in additional annual revenue at today's oil prices.

 

Of course, it won't benefit XOM shareholders anytime soon, since every bit of that new incremental revenue for the next five years is being laid out to turn those revenue spigots on. Yes, after that period, Exxon will benefit from greater production, if those new sources last more than five years -- a serious concern in the shadow of weakening production forecasts for 2012.

 

Unfortunately for current shareholders, all that really matter in terms of a stock's price are the "here and now" performance numbers. And Exxon Mobil just doesn't look poised to post any strong ones for a while.

 

Plus, there's no guarantee XOM won't have to keep pouring a ton of cash into new development beyond the current five-year plan. After all, its current oil and gas sources are already starting to dry up, hence the lowered output expectation for this year.

 

Bottom line

None of this is to say Exxon Mobil is a bad company. It's a fine company, particularly if you like dividends and take comfort in size. The yield of 2.2% is respectable and grows reliably, and the company's $395 billion market cap makes it one of the biggest in the world.

 

It seems, however, that size also has made it tough for Exxon to grow the top and bottom lines. Where else can it go to win new customers as well as efficiently develop new production? The answer: Not enough places.

 

While it's hard to say it's an outright "sell," Exxon Mobil is the last major integrated oil name that should be considered a "buy." Energy investors might want to explore other options -- even BP, now that the fallout from the Gulf of Mexico oil spill is starting to settle.

 

Energy investors also will want to keep their eyes on this Canadian clash of pipeline titans.


As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

 

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9Comments
Apr 11, 2012 11:51AM
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It will be interesting to revisit this post a year from now and see how the various oil companies performed.
Apr 11, 2012 1:10PM
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The only thing they want to do at the moment is get the Keystone pipeline going so they can ship more refined products to the world market.  They don't give two $hits about the American people, what we pay for gas, or our what happens to our domestically produced oil supply, so long as it creates profits for their company.  That is all that matters to them.  So keeping domestic gas supply down is CRITICAL to their profit making.  The want to produce more oil, but keep the price of gas up.  That's their strategy, that is their goal, and they will get it done unless our government stops them, which is highly unlikely in the long term.  Obama is stalling the inevitable, and it has NOTHING to do with environmental impact.  Smoke and mirrors, that's all you will ever see from politicians on this subject.  Powerful politicians cannot publicly acknowledge the truth about the oil companies, because the big oil boys are way too powerful, they can do real harm to them politically through lobbying and withholding money, as they have not been shy about reminding the politicians.  The oil companies strategies and world view wins, as it has for decades.  Get used to it, it's not going to end.  They will get their way, their behavior, strategies, goals and ideals are all fully supported by the majority of the people that make up our government.
Apr 11, 2012 12:31PM
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they're all about the same Greedy as hell. Price of oil has been down, but the price of gas goes up. They're importing oil for what reason. Look at all the oil we have in this Country. We have more than enough to supply this Country. AngryAngry
Apr 11, 2012 1:27PM
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As Milton Freidman once asked of communist Phil Donohue .............. " can you give me an example of an economic system, past or present, which is not based upon greed?"

 

The poor dear, Phil the communist" was just speechless.

 

Duh!

Apr 11, 2012 1:50PM
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ExxonMobil is sitting on substantial natural gas reserves .. mean while, independents are moving into mid-sized oil fields that the major oil companies have over-looked.  Easy oil is getting harder to find and offshore deepwater fields are being developed by Shell and other foreign oil giants. 
Apr 11, 2012 3:37PM
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whats wrong. same thing that is wrong with oboma. they both suck.

Apr 11, 2012 4:33PM
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whats wrong with exxon? there just like the rest on the companys in this country its call GREED and price gouging, i dont buy gas at any major oil company cause there all crooks
Apr 11, 2012 12:46PM
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Hold on to your stocks boyz , you will take a ride as you did in 2008. The greedy oil companies along with the hedgefunds and the SPECULATORS, and the banks are driving it that way as they did in 2008. Oil goes up and the market falls and people are so greedy they keep buying and running the market up so the big stockers can buy it and then sell and drop the market and make boocou money.

Its all about GREED>!

Gary guns you are right about us having plenty of oil here to suffice this country for numerous years.

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