Exxon Mobil (OP/A): Exxon Mobil shares could be ready for next big move up - Goldman Sachs - September 11, 2005
We believe the shares of Exxon Mobil (OP/A) could be ready for its next big move up. The stock is right at the $63 resistance level that coincided with an early March high and a large block sale that served as the catalyst for a correction in the shares at the end of what at the time was a period of sharp relative outperformance. With an asset mix that is both functionally and geographically well balanced, we believe XOM is uniquely positioned to take advantage of high but volatile commodity prices including relative movements in light-heavy crude oil spreads, natural gas versus oil prices, regional refining margins, etc. Trading at just 9.3X our new $6.80 2006E EPS estimate (using $68 WTI), we believe XOM is particularly undervalued vis-a-vis other super-cap stocks. If XOM merely reached the 12X P/E it currently trades on our $5.42 2005E EPS forecast, it would be an $82 stock (+30%).
EXXON MOBIL UNIQUELY POSITIONED TO TAKE ADVANTAGE OF COMMODITY PRICE VOLATILITY
We believe Exxon Mobil's asset base exhibits superior functional and geographic optionality to commodity price and margin volatility. The sharp rise in refining margins but not crude oil prices post-Hurricane Katrina, recent fluctuations in the ratio of crude oil prices to US natural gas prices, and volatile but recently expanding spreads between light-sweet and heavy-sour crude oil we think speak to the benefits of having a functionally and geographically diverse asset base like Exxon Mobil's. It is true that the most recent series of commodity price movements will likely disproportionately benefit a refining-leveraged company like Valero Energy (OP/A), a stock we are recommending. But it is also quite possible that the next disruption in oil markets leads to a different set of commodity price spikes. Exxon Mobil, more than any other company in the oil industry, we think is uniquely positioned to take advantage of whatever swing may occur.
We believe Exxon's asset diversity stands in contrast to its oil and petrochemical industry "peer" group. None of its so-called peers we think have come anywhere close to achieving the level of integrated optionality from crude oil and natural gas feedstock extraction through to refining and petrochemical product output. Exxon's ability to optimize across the full value chain is unparalleled. We believe the benefits of the company's asset base is revealed via its superior profitability at all points of the cycle.
BREAKING THROUGH $63 BLOCK SALE RESISTANCE PRICE AND PREVIOUS $64 52-WEEK HIGH PSYCHOLOGICALLY IMPORTANT
At the risk of being viewed as a technical analyst, we think near-term trading in Exxon Mobil shares has been impacted by a March 9 large block sale that occurred near the $63 mark and proved to be a negative catalyst that led to nearly two quarters of sluggish stock price performance. The block sale came toward the end of a period of share relative outperformance, with an intra-day 52-week high of $64.37 made on March 9 just prior to the block sale. Since March 9, Exxon Mobil's shares are now basically flat in absolute terms, underperforming the XOI (AMEX oil company index) by about 20%, a peer group of BP, Chevron, and Royal Dutch Shell by about 5%, and is about in-line with the S&P 500. Prior to the block sale, Exxon Mobil shares had risen by as much as 25% in 2005, which was essentially in-line with the XOI, but as much as 10% better than the BP, Chevron, and Shell peer group and significantly better than the roughly flat performance of the S&P 500.
EXXON MOBIL VALUATION INEXPENSIVE VERSUS OTHER SUPER-CAP STOCKS IN THE BROADER STOCK MARKET
We have long viewed Exxon Mobil's appropriate peer group as something greater than just other oil companies. Exxon Mobil (and its predecessors) has long been one of the ten largest, if not five largest, companies across the stock market. With the company consistently well managed and profitable throughout its history, its stock has perhaps defined the "buy-and-hold" category. Yet today, investors can buy Exxon shares for a mere 9X our conservative $6.80 2006E EPS estimate that reflects just $68/bbl oil equivalent commodity prices. While some may feel that $68/bbl does not sound that conservative, we believe it will prove so in the same way that $40/bbl is now viewed as a pessimistic price outlook whereas just 9-12 months ago investors would have deemed it quite optimistic.
If Exxon Mobil were to simply trade at the 12X P/E it currently does on our 2005E EPS forecast of $5.42, it would be an $82 stock (+30%). An $82 stock price would correspond to a 15X P/E on 2005E EPS, which reflects $58/bbl oil equivalent commodity prices that currently look conservative relative to 5-year forward futures prices.
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. |
