Why Exxon Mobil Is The Strong Oil & Gas Stock On The Market Today

Commodities / Oil Companies Jul 09, 2015 - 02:57 PM GMT

The oil and gas market is a bit shaken at the moment; and understandably so. After last year's dramatic decline in oil prices and the less than appealing prices we've seen this year, companies in the sector just aren't producing profits like they once did. However, there is one company in the sector that's well worth taking a second look at. That company is Exxon Mobil. In summary, here's why I believe the value of the stock will climb exponentially over the long run...

Oil prices aren't likely to stay low forever.
Exxon Mobil's continued production in the realm of shale extraction is incredibly appealing.
Negative free cash flow issue is being blown out of proportion.
XOM's price to tangible book value is incredibly low at the moment.
Hedging against low oil prices will help to ensure growth.

So, let's talk about these points in more detail...

Oil Prices Aren't Likely To Stay Low Forever

This isn't the first time that oil prices have seen a massive drop throughout history. As a matter of fact, to find the last time, you don't even have to look a decade into the past. During the economic crisis of 2008 and 2009, oil prices fell dramatically as demand for the commodity proved not to be able to hold up the high value. Examples like this actually riddle the past. However, one thing that remains consistent time and time again is that there's always been a recovery. With that said, while oil prices may stay low for the short term, long term investors can rest assured that the price of the commodity will rebound over time. As the value of oil rebounds, the value of Exxon Mobil is likely to follow; giving analysts a reason to talk about the massive long-term upside potential in the stock.

Continued Shale Production Shows Provides Hope For Long Term Investors

Another factor that seems increasingly important to keep an eye on these days is US shale production. While many companies have cut down on the amount of oil they produce from shale extractions due to low oil prices; Exxon Mobil has continued the process. This means that while the development cycle for shale oil is short and very easily could be shut down to preserve capital, Exxon Mobil continues to see favorable gains in the future from shale wells; even at today's incredibly low prices on the commodity.

Free Cash Flow Isn't The Problem Most Think It Is

Another important thing to remember here is that for many investors XOM is a dividend stock. Throughout the years, the company has been able to grow dividends; and this isn't likely to stop. However, this is one of the major concerns that investors have. The reality is that for the past two quarters, XOM's free cash flow has fallen into negative territory; the first time this has happened in over 20 years. Nonetheless, I think that this concern is blown way out of proportion.

One thing that we have to keep in mind here is working capital. The reason the company's free cash flow has fallen into negative territory is a big change in working capital; a $7.5 billion change. Essentially what's happened here is that XOM reduced its liabilities at a faster rate than its assets. So, while free cash flow is down, working capital is up; giving Exxon Mobil the ability to grow even larger!

Exxon Mobil's Price To Tangible Book Value Is Very Low

When looking at the value of stocks, I generally focus quite a bit of attention on the price to earnings ratio on the stock I want to analyze. However, when looking into the commodities sector, this value isn't quite as important. What's more important in this sector is price to tangible assets; and in this category, Exxon Mobil is incredibly strong! This figure looks into the tangible book value of assets owned by the company in comparison to the value of shares. For XOM, the 10-year average price to tangible assets ratio has been 2.9. However, today that figure has fallen to 2.11; which shows that this stock is heavily discounted at the moment.

Exxon Mobil Can Defend Itself Against Low Oil Prices

Finally, while Exxon Mobil is an oil company, they also have the ability to maintain themselves when the value of oil falls. That's because the company currently dominates the refining and chemical sector associated with oil. The key factor here is that while crude oil is less expensive, the cost of refining crude oil and additives associated with the process is generally stagnant at the moment. This means that while oil falls, XOM has the ability to produce positive gains from their refining business; ultimately helping them to hedge against losses associated with the low price of oil.

Final Thoughts

While at first glance, there are a few things that would scare any investor out of investing in XOM, when you look at the bigger picture, the stock is incredibly strong. Sure, oil prices are low and free cash flow in the company is in the dumps at the moment. However, the reason for declining free cash flow is definitely understandable; and with the company's hedge against low oil prices, gains are still to be had for the company. Now, thanks to declines in the energy sector and US markets as a whole, XOM is an incredibly discounted stock. Therefore, those that get in now will likely be thanking their lucky stars for giving them the gumption to do so in the future.

What Do You Think?

Where do you think XOM is headed moving forward? Let us know in the comments below!

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