Exxon Mobil (OP/A): Super-cap stock to own for 2006 - Goldman Sachs - January 30, 2006
We continue to see Exxon Mobil as a superior low-beta portfolio offset to our top high-beta domestic oil/E&P/R&M picks. XOM remains Outperform rated relative to an Attractive coverage view. Despite our bullish commodity macro outlook favoring high-beta oils today, shares of super majors have significantly lagged such that relative risk/reward appears increasingly more attractive. XOM trades at 8% BELOW our $65 "traditional" mid-cycle value (based on a $35/bbl long-term WTI oil). If investors can gain confidence oil prices will remain above normal over the next few years or ratchet-up long-term oil price expectations, we see 35% potential upside to an $81 traditional peak value, implying a 12.5X 2006E P/E. For investors concerned about weak 2005 reserve data at other major oils and hence increased potential for acquisitions, we believe XOM is least likely to do M&A in the current environment.
2005 RESERVE REPLACEMENT FIGURES LIKELY A MORE MEANINGFUL CATALYST THAN IT HAS BEEN HISTORICALLY
We continue to believe that quarterly and sometimes annual data for Exxon, above all companies, are likely to be more noise than truly representative of the company's long-term fundamental outlook. Having said that, given recent disappointing reserves data from several major oil companies, investors will likely focus on Exxon's reserve replacement and finding and development (F&D) costs more closely than in previous years. In our view, if Exxon can show 2005 organic reserve replacement adjusted for price-effects of close to or greater than 100%, it could spark a continued trading rally in its shares. Note, given the start-up of large projects such as Kizomba A and B, Sakhalin 1, Al Khaleej (Qatar), and Rasgas (Qatar), coupled with Exxon's track-record of replacing its volumes produced, we believe it is not unreasonable that Exxon can achieve close to a 100% reserve replacement adjusted for year-end price-effects on reported reserves. Although no date has been set for when Exxon may give guidance on its 2005 reserves, we expect the company to issue a press release in early- to mid-February, consistent with when it has done so in the past.
WE SEE 35% POTENTIAL UPSIDE TO AN $81 "TRADITIONAL" PEAK VALUE, WHICH CORRESPONDS TO A 12.5X 2006E P/E
We estimate a 35% total return to shareholders to an $81 traditional peak value, which is consistent with using a $45 per barrel long-term WTI oil price assumption and implies a 12.5X 2006E P/E. We continue to believe that Exxon should be compared to leading US market companies such as Microsoft and GE, and not merely as an oil company, given overwhelming confidence that Exxon's management team will show capital discipline, reinvest cash flows wisely, and maximize returns on capital employed (ROCE) and shareholder value over the long-run. As such, we believe a 12X-15X 2006E P/E valuation is appropriate for Exxon shares. Note, our $101 super-spike-adjusted peak value for Exxon shares (+66% total return), which adds to our traditional peak value the incremental free cash flow generated during a spike in commodity prices, implies a 15.5X 2006E P/E multiple. While we agree that during above normal commodity prices a cyclically lower P/E is appropriate, we believe Exxon could garner higher valuations as investors either gain confidence that commodity prices can stay above normal over the next few years or ratchet-up long-term oil price expectations, both of which we believe are possible in 2006.
By way of comparison, we see the super-cap oils on average having +10%/+37% upside potential, and the domestic oil and E&P group having -17% downside risk/+12% upside potential to traditional mid-cycle/peak values, respectively. Despite our favorable view of Exxon shares, other super-cap oils currently show similar upside as Exxon based on historical EV/DACF (enterprise value to debt-adjusted cash flow) valuation trading ranges. In our view, given the increased likelihood of future acquisitions (as well as acquisitions already taken place) at several major oil companies except for Exxon, we wonder if all the super-cap oils could indeed maintain long-term ROCE of 12%-15% and hence garner the historical valuation multiples. We believe Exxon can achieve full-cycle (i.e., over 20-30 years) ROCE at the upper-end of that range. See Exhibit 1 for comparative risk/reward and valuations.
4Q 2005 RESULTS ABOVE EXPECTATIONS
Exxon Mobil's adjusted 4Q 2005 EPS of $1.65 ($1.71 on a reported basis including special items) was above the $1.44 First Call consensus estimate and our $1.50 forecast. The positive variance was primarily driven by higher-than-expected international E&P earnings. Exxon reported overall 4Q E&P production of 4.27 million BOE/d versus our 4.16 million BOE/d forecast, with E&P net income at roughly $18 per BOE versus our $16 per BOE forecast. Earnings from R&M and chemicals were largely in line with our forecasts. In our view, the roughly 19% increase in overall capital expenditure for 2005 over 2004 was in line with our expectations and largely in line with the 15%-20% increase industry-wide for the same period. We currently expect to see a further 15% increase in CAPEX for 2006, which again is largely in line with the 15%-20% increase we are forecasting industry-wide.
UPDATING ESTIMATES
We are introducing our 2006 quarterly EPS estimates, which stand at $1.54 (1Q), $1.59 (2Q), $1.57 (3Q), and $1.80 (4Q). We have made no change to our full-year 2006-2010 EPS estimates. Higher assumed E&P realized prices, updated E&P production profile, higher estimated international E&P tax rates, lower assumed corporate charges, updated commodity price assumptions, and minor other adjustments were collectively neutral to our 2006-2010 EPS estimates. Note, we have tweaked our 2006 Henry Hub spot natural gas price assumption to $9.50 per MMBtu ($10 before), our 2006 and 2007 California refining margin to $24 per barrel ($28 before), and our 2006 New York, Chicago, and Mid-continent refining margins to $10.75 ($11 before), $11.50 ($13 before), and $11 ($13 before) per barrel, respectively. See Exhibit 2 for a summary model of Exxon.
Goldman Sachs & Co. and/or one of its affiliates is acting as financial advisor to ConocoPhillips in the proposed acquisition of Burlington Resources Inc. Goldman Sachs & Co. and or one of its affiliates will receive a fee for its financial advisory role.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Arjun Murti, Luis Ahn. |
