ExxonMobil (NYSE: XOM) Has the Eye of the Tiger

by Tony D’Altorio, Investment U Research
October 23, 2009

ExxonMobil (NYSE: XOM) is one of those companies people love to hate.

The firm racks up billions in profits each year, yet it’s been sluggish to develop green technologies (although that’s slowly changing now), despite a $600 million investment into an algae-based biofuels project.

Some critics, including major shareholders, also criticize the company’s overly conservative management. They say that Exxon has a poor strategy for future growth and is too slow to replace its reserves.

With limited investment into finding new sources of oil and gas, ExxonMobil has instead spent $109 million to buy back shares and increase dividends by 58% over the past five years.

Last year alone, Exxon returned $40.1 billion to shareholders through buybacks and dividends, amounting to 154% of its capital investment and exploration spending.

But despite its “failings” in this area, ExxonMobil somehow still not only obtains oil, but also manages its production to perfection.

This Tiger is a Cash Cow

The company’s strength lies in its superior money management skills.

By tightly managing the $60 billion in cash flow that it scooped in from operating activities last year, ExxonMobil racked up a 50% return on average capital employed in its exploration and production division.

It’s that kind of tight control that has made ExxonMobil the largest publicly listed oil company in the world with unrivaled financial strength in its industry. And because of that superior management, it now has a huge cash pile to buy energy projects and financially distressed bargain companies.

And with the credit crunch having left multiple mid-tier oil companies poorly prepared to develop promising fields, Exxon has prime picking.

Striding Into Australia and Africa

Right now, ExxonMobil is working on about 120 energy projects – ones that boast large, efficient, long-life assets that should return more than 50% on capital employed.

Take the enormous Gorgon LNG (liquefied natural gas) project in western Australia, for example, of which ExxonMobil already owns 25%.

Holding as much as 50,000 billion cubic feet of natural gas, it has the potential to make a material difference to the company’s bottom line, while simultaneously offering geographic diversification from ExxonMobil’s current major LNG assets located in Qatar.

In addition, it just purchased Kosmos Energy for $4 billion. With it comes a stake in the Jubilee field – the biggest deepwater oil field in Africa and ExxonMobil’s largest investment in a decade.

Discovered in 2007 off the coast of Ghana, the field is divided into two license areas. Kosmos and ExxonMobil hold a 31% and 18% stake respectively.

The bottom line is that with billions of cash ready to be deployed at any moment it chooses to, ExxonMobil is proving that in this climate, cash is king. And given its impressive ongoing ability to generate more cash flow, investors should focus on this long-term growth approach, rather than short-term fluctuations.

Good investing,

Tony D’Altorio

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