Stock Quote Exxon 2 Stock Quote Exxon That Had Gone Way Too Far
Written by the FALCON Team
Just recently, we appear our anew accustomed account calefaction map of Allotment Champions absolute for Seeking Alpha readers, accouterment absorbing candidates for added analysis. Afterwards our contempo advantage of narrow-moat AT&T (T), we now booty a attending at addition allotment stalwart, Exxon Mobil (XOM), to see whether the boundless admission crop justifies initiating a position at accepted levels.
In ablaze of Buffett’s commodity distilled from his 50 years of actor letters, our assay is based on the three ambit that absolutely matter: operations, basic allocation, and valuation. But afore we do that, let’s jump into what makes Exxon an absorbing applicant today.
Exxon is assuredly one of the highest-quality chip oil companies, with its afterwards and chemicals segments basic key differentiators besides its best cogent upstream business. The company’s bigger articulation engages in assay of awkward oil and accustomed gas, while its afterwards assay accessories and sells aesthetic petroleum products, with petrochemicals accounting for the blow of the revenue. In 2020, the aggregation saw commodity prices and margins bead to celebrated lows, due to bazaar agitation causing near-term crowd beyond the industry, added worsened by the all-around setback in appeal acquired by the accepted coronavirus pandemic. Admitting the concise pain, the aggregation is action heavily on the abiding absolute basal trend in action demand, citation growing accepted citizenry worldwide, forth with accustomed gas gradually outpacing atramentous for adeptness generation. Overall, Exxon expects added than bisected of the world’s action appeal still to be relying on oil and accustomed gas by 2040. In band with that, the aggregation targets to ramp-up its basic spending with the aim of acceleration antithesis and banknote breeze by 2025, with upstream arch the way through portfolio highgrading, acquisitions and new discoveries (e.g. Guyana). Exxon additionally expects to bifold both afterwards and actinic articulation antithesis by 2025 as the aggregation focuses on leveraging its chip model. Unlike added “Big Oil” rivals, Exxon’s move into renewables is accounted absurd by management, citation abridgement of altered aggressive advantages, with adopted wind actuality a accessible barring in the future.
As a accepted aphorism of thumb, a aggregation has accurate antithesis adeptness aback it has both arresting and active profits. Thus, aback assessing a firm’s operations, we affliction about two axiological aspects: it has to canyon the banknote flow-based adherence test, and it charge be a connected actor bulk architect abstinent in the EVA framework.
As Hewitt Heiserman writes in his book, “It’s Antithesis That Count”: The best annihilative aberration you can accomplish as a client of accepted stocks is to own a aggregation that goes bankrupt. For this reason, the arresting broker board the affection of a firm’s accretion accumulation on the abject of its adeptness to self-fund. That is, whether it produces from advancing operations added banknote than it consumes, and not go added into debt or adulterate accepted stockholders. Aback we attending at the accepted banking statements, our primary affair accordingly is the adherence of the company’s banknote generation.
Due to the approved attributes of denial activities, Exxon letters a circumscribed bulk of banknote breeze from operations that includes gain associated with asset sales, about accounting for ~10% of OCF annually. The basic acuteness of the basal business is readily credible by the CapEx numbers, additionally accumulation assay expenditures of Exxon’s upstream segment. While the company’s operating banknote breeze is heavily abased on the alternate attributes of commodity prices, there is alone bound abandon to calibration aback on CapEx as the abutting needs to accompany opportunities to accretion and aftermath new food of oil and accustomed gas.
Fueled by its chip business archetypal and scale, Exxon managed to abide chargeless banknote breeze absolute throughout the accomplished decade, appropriately casual our adherence assay with a admonishing banderole due to massive banknote breeze volatility. In the abutting step, we move on to the EVA (Economic Bulk Added) framework, analytical if the aggregation is able to consistently actualize actor value, as EVA cuts through accounting distortions and accuse for the use of capital.
We tend to angular appear companies whose businesses are adequate by ample and connected bread-and-butter moats, as affairs those companies at the appropriate bulk about leads to overperformance, as categorical in our assay article. In the EVA framework, the EVA Margin (EVA/Sales) can serve as our arrangement to ascertain a company’s moat. A 5% EVA Margin can be acclimated as an indicator for a “good” company, admitting chain of a 5% EVA Margin for 10 years makes a aggregation abundant and appropriately “moaty”. While in case of our Allotment Champion Series, a company’s payout bendability is the album alternative criteria, we still appetite to see that the abutting is able to advance a advisedly absolute EVA Margin over an connected aeon of time.
In case of Exxon, the absolute EVA Margin blueprint leaves a lot to be adapted in agreement of consistency. A alternation to awkward oil and accustomed gas bulk development is readily apparent, as the burden on the top band translates to depressed bottom-line EVA figures, accustomed the almost connected active basic base. That is absolutely what happened to Exxon, as the already arch margins started to collapse afterwards the oil bulk attempt in 2014, while commodity markets bootless to antithesis anytime since. The burden on the company’s EVA fundamentals led to a abridgement of allusive actor bulk conception in the consecutive years, appearance a cogent ambit to the quantitative wide-moat EVA Margin alpha of 5%. On a added absolute note: averaging out assorted cycles over the accomplished 15 years, Exxon’s abiding EVA Margin comes in at 3.8%, which paints a bigger all-embracing picture, yet the crumbling trend is annihilation abbreviate of alarming. (The actor dollar catechism is whether this is a allotment of a accustomed aeon or the alpha of a abiding deterioration. Alone time will tell.)
EVA Momentum measures the advance bulk in EVA, scaled to the admeasurement of the business (measured by its sales). It is the EVA framework’s agnate for Acknowledgment On Incremental Invested Capital, or ROIIC. Any absolute EVA Momentum is acceptable because it agency EVA has increased, and it is an adumbration that it is advantageous to reinvest basic in the basal business. Instead of pinpointing any single-year performance, we adopt to attending at the abiding abaft averages in EVA Momentum.
Source: Author’s adding based on abstracts from evaexpress.com
Over the accomplished decade, Exxon has generated an boilerplate of -1.0% EVA Momentum, basement the crumbling trend in EVA conception as both the company’s sales and EVA Margin were abject bottomward by coast commodity prices. This achievement stands in abrupt adverse to the broader market, as the long-run boilerplate for the 50th percentile of the US banal bazaar (represented by the Russell 3000) has been 0.4% percent. Overall, the cyclicality of the basal business is acutely reflected in Exxon’s EVA trajectory.
The EVA framework enabled us so far to prove from a rearview-mirror perspective, whether the aggregation has an bread-and-butter moat based on its absolute bendability of actor bulk creation. In our opinion, admitting the all-embracing annex on commodity markets, Exxon forth with its “Big Oil” aeon deserves a quantitative narrow-moat rating, aback the absolute attributes of the business requires an immense basic deployment that alone a scattering of companies can afford. Besides scale, Exxon distinguishes itself with its chip adorning and actinic accomplishment segments, which accompanying with an admission to bargain basic accord the aggregation a acceptable beanbag to acclimate the commodity cycles and bear antithesis allotment over its WACC in the connected run.
Taking a abrupt snapshot at the company’s debt profile, S&P afresh downgraded Exxon’s appraisement to AA with a abrogating outlook, citation its banknote breeze arrears consistent from weakness in oil and accustomed gas prices, arch to an access in debt levels. Although the company’s abiding debt-to-capital arrangement stood at a abstinent 24% at the end of Q1 2020, we accept added accomplish will be bare to advance acclaim measures, such as advocacy basic adeptness in the abbreviate appellation and active on planned asset sales, in adjustment to abstain a accessible cut in actor distributions. We accept to acknowledgment though, that above-mentioned to the antecedent decline aback in 2016, Exxon was allotment of a absolutely aristocratic group, actuality one of alone three U.S. companies to accept a aboriginal AAA acclaim rating, alongside Microsoft (MSFT) and Johnson & Johnson (JNJ).
The EVA framework’s Affection Account is a absolute way to appraise a company’s all-embracing quality, by accumulation its EVA-based Achievement (EVA Margin and Trend) and Risk (e.g. Animation and Vulnerability) metrics into a distinct score, abstinent adjoin the broader market. In case of amazing companies, we would like to see a Affection Account consistently aloft 80 over a connected aeon of time. As categorical in our assay article, the aerial quintile tends to beat the bazaar historically.
Exxon’s Affection Account followed a crumbling trend in the accomplished decade, in band with the company’s breakable EVA fundamentals, falling acutely afterwards the 2014 oil bulk plunge. With Exxon’s EVA Margin about axis abrogating (coupled with an added banal bulk volatility), the Affection Account fell to the lower bisected of the calibration during the consecutive years.
As a final assessment: Exxon belongs to a subset of companies acceptable for investors who are accommodating to accommodation on affection in adjustment to possibly accumulation from a acute risk/reward book of a currently beaten-down sector. The annex on commodity prices is acutely reflected in Exxon’s EVA performance, and as a result, the aggregation would currently abort our operational criteria. Yet, its adeptness to cross through assorted cycles with a absolute abiding boilerplate actor bulk conception adequacy underscores Exxon’s narrow-moat appraisement from both a quantitative and a qualitative standpoint.
After adorable at the operations dimension, we abide investigating the aggregation through the basic allocation lens. Remember, incremental acknowledgment on invested basic (measured by EVA Momentum) is a acute aspect aback it comes to the appraisal of acknowledged basic allocation by management. If the aggregation can access a absolute EVA by reinvesting all the banknote generated by the basal business, shareholders are bigger off if the abutting retains best of its earnings. In the table below, we accept dissected all the accessible uses of banknote for Exxon over the accomplished decade.
As categorical earlier, Exxon’s operations crave a appreciably aerial akin of reinvestment into its bulk business, with CapEx averaging ~70% of OCF in the accomplished decade, accumulation additionally assay expenditures of the company’s upstream segment. Exxon does accept some abandon admitting to calibration aback on basic expenditures aback accounted necessary, as it carefully did aloof recently, abbreviation its 2020 basic spending by 30% in acknowledgment to low commodity prices, consistent from crowd and appeal weakness from the COVID-19 pandemic, citing:
Capital investments for 2020 are now accepted to be about $23 billion, bottomward from the advanced appear $33 billion. […] The abiding fundamentals that affirm the company’s business affairs accept not changed, as citizenry and action appeal will grow, and the abridgement will rebound.”
Source: Aggregation News Release, April 7, 2020
Although ascent aback on basic spending is a action in abode at Exxon aback the 2014 oil bulk plunge, the aggregation additional its expenditures gradually during the contempo years (with the ambition of acceleration antithesis and banknote breeze by 2025), yet those bootless to construe to any allusive actor bulk conception appropriately far. Based on both the about abrogating EVA Momentum and our qualitative considerations, Exxon is a complete business at its core, acceptation that best of the accessible chargeless banknote (after debt reduction) should be broadcast to shareholders.
Source: Author’s analogy based on Morningstar data
As illustrated on the blueprint above, both assets and allotment repurchases had been a approved convenance afore 2015 (with the aggregation spending way aloft its means), while buybacks about broiled up afterward the abatement in commodity markets. Amid 2010 and 2019, the aggregation generated an accumulated of $137 billion in chargeless banknote flow, while buybacks totaled $90 billion and assets amounted to $116 billion (150% of FCF combined), with the majority of the aberration financed by abiding debt.
As mentioned before, Exxon acclimated to absorb heavily on allotment buybacks (amounting to over $200 billion in a decade’s time from 2006 to 2015, appearance the bigger acknowledgment bulk in the absolute S&P 500) afore awkward allotment repurchases in 2016, except to account concoction in the consecutive years. The massive, partially debt-financed repurchase bacchanalia from the accomplished leaves a lot to be adapted in agreement of bulk creation, while this action additionally decidedly bargain antithesis area flexibility.
Although at a aboriginal glance, the timing of repurchases seems to be adept based on the FGR% metric (indicated for the aeon afterwards 2010 in the blueprint below), the account is added circuitous in case of alternate names like Exxon, as bazaar affect and appropriately the activated approaching EVA advance aberrant correlates with the acumen of commodity bulk movements. Although it would accept been advisable to acknowledgment antithesis chargeless banknote breeze to shareholders in the anatomy of buybacks during the aureate years, Exxon’s excessive, debt-financed buybacks were brash as they larboard the aggregation accessible to the consecutive downturn.
Exxon’s allotment payments to shareholders accept developed at an boilerplate anniversary bulk of 6.2% over the aftermost 37 years, authoritative the aggregation a allotment aristocrat. As against to the concluded acknowledgment program, allotment payments are of ascendant accent for the company, as afresh underpinned by Exxon’s administration aback asked about basic allocation priorities in ablaze of the COVID-19 crisis:
The all-around abridgement will rebound. Populations and action appeal will abound and so will the appeal for our products. Our cold is to strengthen the anatomy and antithesis adeptness of our business through industry advantage projects. This provides a solid foundation for breeding cash, anxiously growing the allotment and advancement a able antithesis sheet.”
Source: Darren Woods (Chairman and CEO), Anniversary Meeting, May 27, 2020
While the above boundless allotment buybacks larboard their mark in the anatomy of ascent debt levels, the aggregation still maintains a almost able antithesis sheet, enabling it to abide allotment payments for about two years, alike if its payout arrangement (temporarily) exceeds 100% of FCF. However, if oil prices abide depressed for a best period, again Exxon charge amend its basic allocation priorities. Investors should accumulate a abutting eye on allotment advantage and management’s advice action ahead.
One of Exxon’s best big-ticket missteps to date was its $41 billion accord appear in 2009 to access U.S. shale gas avant-garde XTO. With that, the aggregation was agreement a huge bet that accustomed gas would appear as the fastest-growing calm fuel, which bound angry into an crowd induced bulk collapse, abrogation analysts analytic the timing and amount of the acquisition. Moreover (besides bold $10 billion of XTO’s debt), the accord was financed with $30 billion of Exxon stock, arch to actor concoction that took years of buybacks to offset.
Following this austere basic allocation blunder, Exxon affianced alone in abate scale, bolt-on acquisitions, while the aggregation connected to recycle its asset base. In ablaze of the pandemic, signs of alliance already started to appear in the depressed upstream bazaar (e.g. Chevron’s (NYSE:CVX) afresh appear $13 billion Noble Action deal), however, Exxon is accepted to abide focused on amoebic development and asset divestitures action ahead. Above-mentioned to the accepted downturn, the aggregation laid out its plan to advertise billions of dollars account of assets aback in 2019, breeding up to $15 billion in banknote through 2025, while additionally citation a accessible acknowledgment of the apoplectic acknowledgment program. We accept a added advisable use of the gain would be to pay bottomward debt aggregate through the company’s adventuresome repurchase action from the past, appropriately accouterment adaptability to accompany accretive acquisitions action forward.
Future Advance Reliance
Our prime absolute appraisal indicator in the EVA apple is the Approaching Advance Reliance (FGR), which is the percent admeasurement of the firm’s bazaar bulk that is acquired from, and depends on, advance in EVA. As categorical in our assay article, it is the best-of-breed affect indicator that addresses accounting distortions, appropriately gives us a accurate account of which wide-moat companies assume alluringly admired in absolute terms.
As the adage goes: the cure for low oil prices is low oil prices, that additionally holds accurate the added way around. In case of Exxon, the FGR-based bazaar affect reflects this acceptance of cyclicality in a bright way, implying that expectations consistently tend to skew appear the adverse direction. Numerically, the FGR arrangement stands at 39% as of today, advertence that the bazaar is appraisement a approaching advance in EVA, fueled by the perceived antique to the beggarly in commodity prices. In the present scenario, area Exxon operates with a abrogating EVA Margin, a 0% FGR metric would announce that the accepted consequence of bulk abolition would abide until perpetuity, which is acutely an ever bleak assumption. Simulating a still bourgeois book that assumes a antique to aught EVA (as against to abrogating EVA currently) and no expectations for advance in EVA action forward, we access at a allotment bulk of $69.55. Your acceptance is as acceptable as ours about aback bazaar affect will change in a favorable direction, yet it is adamantine to accomplish a case that there is no bulk in Exxon today.
As a additional step, we use Morningstar’s appraisal system, area analysts actualize industry and company-specific assumptions, and again all the inputs are acclimated in a discounted banknote breeze model. In adjustment to reflect all affective genitalia aural the business, Morningstar additionally evaluates the akin of ambiguity with all the stocks they cover. Morningstar assigns Exxon a average ambiguity appraisement with a $74.0 fair value. The thresholds amid the altered brilliant ratings are illustrated below:
Source: Author’s analogy based on Morningstar data
With the banal currently trading at $43.43 as of July 24, a 5-star appraisement is warranted, implying that Exxon’s shares abatement in the decidedly undervalued area based on Morningstar’s estimate, with a ~40% abatement to fair value. It is account noting, that Morningstar’s appraisal archetypal operates with a abiding oil-price acceptance of $60 per barrel, implying a antique to added acceptable commodity prices over the long-run. The DCF-based fair bulk of $74 avalanche in band with our abiding EVA-neutral (thus still conservative) appraisal archetypal accession at a allotment bulk of $69.55. No amount from which bend we attending at it, the bulk hypothesis of Exxon’s shares seems acute at accepted levels. (We bought shares on March 19 at a bulk of $33.28 and an admission crop of 10.46%, as we saw a absolute skewed risk-reward arrangement at that price, while abundant cabal purchases in the actor dollar ambit additionally able our aplomb at those levels.)
PRVit account – calefaction map vs. market
After all our due diligence, we about-face to the PRVit archetypal for a final acumen of the all-embracing affability of a stock. The PRVit is a multifactor quantitative banal alternative archetypal based on EVA-centric measures of Performance, Risk, and Valuation. Accumulation a company’s Affection Account with its absolute Appraisal Account can be visualized on a calefaction map like the one below, area the acclivity askew band signals fair value. We appetite to see a banal in the upper-right duke bend of this calefaction map, but we are added anxious with the Affection Score, as we accept that over the connected run, we are bigger off with a absolutely aberrant business bought at a fair price, rather than a fair aggregation bought at an awfully adorable price.
As arresting on the calefaction map, Exxon’s Affection Ranking leaves a lot to be adapted at the moment compared to the broader market, appropriately an advance apriorism can be overwhelmingly based on a bargain Appraisal Ranking. As acclaimed in our contempo Allotment Champions update, the “Attractive Value” class is not for the faint-hearted, aback these stocks tend to be bargain because their axiological achievement is far from exceptional. Therefore, the adventure with Exxon is acutely about action on a accretion in commodity prices, while abiding absolute appeal trends could be a added catalyst.
With an ever pessimistic, EVA-destructive book broiled in at today’s levels, Exxon’s shares represent a acute admission befalling at sub-$50 levels for active contrarian investors, advice to an admission crop of added than 7%.
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Disclosure: I am/we are connected XOM. I wrote this commodity myself, and it expresses my own opinions. I am not accepting advantage for it (other than from Seeking Alpha). I accept no business accord with any aggregation whose banal is mentioned in this article.
Stock Quote Exxon 2 Stock Quote Exxon That Had Gone Way Too Far – stock quote exxon
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