We have maintained our Neutral recommendation for the world’s largest publicly traded oil company, ExxonMobil Corporation (XOM) for the long term. The oil giant’s superior record of return on capital employed, excellent credit profile and access of significant unconventional resources were partially mitigated by its relatively low 2011 production growth target.
ExxonMobil is the world’s best-run integrated oil company given its track record of superior return on capital employed. As the largest publicly traded oil company, it has long been a core holding for investors seeking a defensive name with continued dividend growth.
The company’s exceptional AAA credit profile with pristine balance sheet is the envy of the industry. It has maintained its dividend at an annualized $1.88 per share, yielding an attractive 2.72%. In the second quarter of 2011, Exxon returned $7 billion to shareholders through dividends and share buybacks, which we expect will increase in the near term.
Following the XTO acquisition, ExxonMobil is enjoying access to a major North America's newest energy discoveries, as it looks forward to the growth of natural gas in expanding its share of the world's largest energy market.
The company’s unconventional resource base in the U.S., managed by its XTO subsidiary, has increased from 45 trillion cubic feet equivalent (Tcfe) to 76 Tcfe since the merger, mostly due to acquisitions and revisions. Hence, the integration of XTO is acting as a positive catalyst.
The company expects its total output to grow 3% to 4% in 2011 and 4% to 5% per year on average through 2014. Although ExxonMobil remains fairly active in its investment program –– reflected by a $34 billion capital expenditure budget for 2011 –– we remain disappointed by its relatively low production target for the year. Importantly, a lower guidance implies an equivalent drop for organic production.
Again, ExxonMobil replaced over 100% of its proved reserves in 2010, however, this depended largely on XTO volumes. On an organic basis its replacement rate was only 45%.
Hence, considering the above discussions, we expect the stock to perform in line with the broader market comprising peers such as Royal Dutch Shell Plc (RDS.A).
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