Exxon Mobil (OP/A): 15 x $5.55 = $83, providing 40% total return potential
Goldman Sachs July 28, 2005
We see meaningful upside for the shares of Exxon Mobil and reiterate our Outperform rating relative to an Attractive coverage view. We believe as investors gain confidence our $55/bbl 2006 WTI oil forecast is conservative that Exxon Mobil can move from an 11X P/E on 2006E EPS to at least a 14X- 16X P/E range. Such a valuation implies 40% total return upside to a $83 value, a very strong potential return for a conservative, super-cap stock market leader. We continue to have a very high degree of confidence that Exxon Mobil management is most likely to spend cash flow from high commodity prices wisely, as highlighted by its now $20 billion annualized stock buyback run rate.
KEY COMPANY-SPECIFIC CATALYSTS
(1) Market confidence in $55+ oil for 2006 key to P/E expansion for Exxon Mobil. We believe Exxon Mobil is trading very inexpensively on an absolute and relative (to the S&P 500) basis versus its history. While an investor might understandably make the point that the discounted valuation is consistent with a sense of "peak" EPS power, we do not believe our 2006 EPS estimate of $5.55 will prove to be peak. Our base-case 2006 WTI oil price forecast of $55/bbl we think will prove conservative. Ultimate peak EPS upside will of course depend on how high oil prices ultimately go. It remains our view that oil prices need to get to a level high enough for a long enough period of time in order to reduce energy demand on a multi-year basis only after which do we think a sufficient spare capacity cushion will be recreated and lower prices potentially return. This in a nutshell is our "super-spike" view. Given continued resilient oil demand growth and a lack of any observable spare capacity throughout the oil supply chain, we believe the ultimate peak WTI oil price will be in excess of $55/bbl.
(2) Share repurchase increased to a $20 billion per annum run rate, net of options dilution. We believe Exxon Mobil continues to demonstrate unparalleled financial discipline, which has been critical to its sustained ROCE advantage versus the sector over long periods of time. In 3Q, the company will raise its share repurchase program to a $5 billion quarterly run rate net of options dilution (note: most companies state share repurchase on a gross basis in contrast to Exxon Mobil), which annualizes to a stunning $20 billion per year. If a $20 billion annual program is sustained, we believe Exxon Mobil would be on-track to repurchase all of the shares issued by legacy Exxon for Mobil by 2010.
(3) CEO transition--it will happen some day, but the impact should be muted. We think Exxon Mobil's version of "glasnost" over the past few years has helped greatly in improving the visibility of its senior leadership with the apparent goal of reducing potential stock price turmoil when long-standing and highly regarded CEO Lee Raymond eventually retires. We have confidence that a future Exxon Mobil senior management team led by president and CEO heir apparent Rex Tillerson will continue the disciplined, shareholder friendly strategies of Mr. Raymond.
2Q 2005 RESULTS STRONG THOUGH 1 CENT BELOW AN INFLATED FIRST CALL ESTIMATE
Exxon Mobil reported 2Q 2005 EPS of $1.23, which was ahead of our $1.18 forecast but 1 cent below what we view to have been an inflated First Call consensus expectation of $1.24. We note that the First Call consensus was just $1.11 one month ago and was $1.20-$1.22 within the past week. Relative to our expectations, E&P and R&M results were strong while chemicals was below our forecasts. E&P production in 2Q fell 4.3% on an actual basis, which was a bit worse than our -3.6% expectation. Adjusted for asset sales and production sharing contract (PSC) entitlement effects, E&P production decline 2% in 2Q after falling an adjusted 2.3% in 1Q. Year-over-year E&P volume growth, adjusted for asset sales and PSC effects, is expected to move back into positive territory in 3Q and 4Q.
UPDATING ESTIMATES
We have raised our 2005 EPS estimate to $4.81 from $4.75 to account for the positive 2Q variance. We have made no change to our 2006 EPS forecast of $5.55 nor our 2007-2010 normalized projections.
I, Arjun Murti, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. |
