XOM Stock – is ExxonMobil’s Stock a Good Buy

hey YouTube I’m Jimmy in this video I’m
gonna walk through my analysis of Exxon Mobil ticker symbol XOM this continues
our series where we’re analyzing all 30 stocks in the Dow Jones Industrial
Average once we’re complete with our analysis we’re gonna build three
different portfolios a dividend portfolio a value portfolio in a growth portfolio
this is the eleventh video in that series and you can see a link in the
description below to all eleven videos now I put the link to the chevron video
first because Chevron’s also in the oil and gas industry and this is a highly
competitive industry and in that video we went through the industry the
analysis comparison between Shell Chevron and Exxon Mobil and I’m not
really going to touch on much of that here in this video we’re gonna focus
more on the factors that influence Exxon as a business so Exxon focuses primarily
on the upstream and downstream market the upstream market is when oil and gas
gets extracted from the ground downstream is when they refine it and
they sell it at gas stations things like that and it’s important to know that
Exxon has always been known as great executors throughout their business
particular in the upstream segment now there are a few key measurement tools
that we can use to see how the energy business as a whole is doing we can use
the most obvious one is the price of oil the price of gas and then you have a rig
count which helps gauge upstream activity then you can look at the crack
spread which helps gauge downstream profitability so for now why don’t we
kick it off with a chart of oil now this chart goes back about five years and you
may remember that this big dip here this is back in 2015 but what’s interesting
to me is that when we shorten up the timeframe from five years to a bit over
a year well we can see that the price of oil has been down recently now this
chart this is a chart for WTI which is oil that comes out of West Texas you may
have also seen quotes for Brent oil Brent oil is a quote for oil prices that
come off come out of the North Sea off the coast of England typically Brent oil
is world oil WTI is American oil but they act very similarly to each other as
you could see here another interesting metric to look at is the rig count the
most popular indicator for rig counts is the Baker Hughes rig count
here’s what that chart looks like the orange line is oil the blue bars are
rigs a rig is what they use to extract oil and gas from the ground the rig
count measures all active oil and gas rigs in the United States and Canada
So the theory being the more rigs that are being added well the more confident
the industry is in let’s say the price of oil the price of gas the more
optimistic they are that if they put this rig up they’re going to make money
with it so that should be positive for the
industry although the effects of a rising rig count isn’t necessarily black
and white as we can see rigs have trended higher recently and more rigs
implies a higher confidence but more rigs leads to more production more
production means that there’s going to be a greater supply of oil and gas in
the market which in theory will drive the price lower falling prices would
lead to less profitable rigs and that means that in theory the industry is not
going to put up as many rigs so I don’t think that the recount is terribly clear
as a predicting tool at least in the short term but now where this could be
very useful is if we were trying to build a full valuation model if we knew
how many rigs were going up and then we could get the average price of oil and
gas hypothetically we could use that information to create a better forecast
for revenue and profits now if we were doing that we’d also want to know how
Exxon was doing in their downstream business and for that we could use
something like their refinery throughput throughput is a measure of how much
crude oil exxon mobil can refine basically what’s their capacity now to
tie this all together this chart is very helpful this chart is capacity
utilization so this tells us if you look at the tall middle bar we can see that a
bit over 93% of their available capacity was used the higher the number the
better for capacity utilization okay so now how do we value Exxon and should we add it to any of the portfolios first off their dividends are pretty good and
rather reliable their current dividend yield is about four
percent so that’s good to know and but we also know that the price of oil has
fallen recently so let’s see what analysts think about revenues and
profits going forward okay so here’s a chart of revenue the green bars are
estimates and it looks like analysts are expecting a dip in revenue going out to
2020 and 2021 when we look at earnings per share we can see the same thing now
a lot of these projections will have to do with the price of oil when we when
oil went down back in 2015 we can see that that had a lasting impression on
earnings per share now if you saw our Chevron video you may remember that one
of the things that we uncovered was that the downstream segment for oil and gas
companies tends to be a large driver of revenue but not an enormous driver of
margins now one of the things we can do to gauge how margins are being driven is
by looking at something called the crack spread basically in refining the process
of refining includes cracking oil crude oil and breaking it down into
things like gasoline heating oil diesel jet fuel things like that well this
chart this is the Cushing three-two-one crack spread the crack spread can be
used to project refining margins and there are a whole bunch of different
crack spreads that could be used but in this example the three two one crack
spread it assumes that for every three barrels of crude oil brought into the
refinery two barrels of gasoline are produced and one barrel of distillate is
produced to sum it up basically what it means the higher the crack spread the
higher profit margins should be okay so now we know oil has been on a steady
decline recently the crack spread has pulled back a little bit but overall it
still appears to be in the same general area it has been over the past few years
so the real question is how can we try to come up with a fair value for
ExxonMobil so once again as I said in the Chevron video I’m a big fan of
enterprise value to EBITDA for these types of companies p/e tends to be a bit
too volatile and when we look at the volatility of energy prices that makes
PE very difficult to use where EV to EBITDA on the other hand is a bit more
stable and I think it’s great for oil and gas companies and it’s very popular
among analysts so I think that confirms it’s at least as stability of
it so now the first question is what’s exxon’s current EV to EBITDA multiple so
currently Exxon is trading at a forward EV to EBITDA of about 6x so where should it be well when we look at Exxon’s 3 year average
it’s about 9x their five-year average is about 8x so according to their own
history it looks like Exxon may be undervalued how about their competitors
well Chevron is currently trading at a forward EV to EBITDA of about 5x while
Royal Dutch Shell is trading at about 6x so according to their peers it would
seem that Exxon might be slightly overvalued but you may remember in the
Chevron video that Exxon’s business is a bit more stable than both Chevron and
Shell this was the chart that I showed in that video and this orange line
this is Exxon’s profit margins and as you could see
despite the collapse in oil back in 2015 Exxon remains positive meanwhile Shell
lost money and so did Chevron so with this in mind it makes sense to me that
Exxon would be trading at a premium relative to peers so now the question is
which multiple is the best multiple to use so when we think back to the price
of oil we know that it’s fallen recently so has the crack spread now if we go back
to this 5-year chart of oil we can see that this chart this five-year chart
includes oil above $100 a barrel a collapse of recovery and the current
pullback that were in so to me using a 5-year average for our EV to EBITDA multiple would incorporate all this craziness in there so to me that is a
reasonable multiple to use another reason I like it is it is lower than the
three-year average which implies a more conservative approach which I’m okay
with so if Exxon was trading at its own
five-year average of 8 X now that 8 X was actually 7.75 X I just rounded it
but to me to be more accurate I’m gonna use the 7.75 X for our calculation now
EBITDA over the next 12 months is expected to be about fifty nine billion
dollars giving us an enterprise value of a bit over 464 billion now all we need to do is subtract debt net debt was about thirty
nine billion dollars dropping the fair value of our equity to about four
hundred twenty five billion divide that by the shares outstanding and we get a
fair value of about a hundred dollars per share now given that the current
stock price is about eighty dollars per share
it seems that Exxon could be a good buy in this area for a long term portfolio
now if we add this to one of our portfolios we have to be ready for oil
to keep collapsing and we know that over the short term it might look like
Exxon’s a good buy right here but we also know that energy companies aren’t
in control generally of the price of oil so if it keeps falling we have to be
ready for them to keep falling with it now we already mentioned that Exxon has
a pretty good dividend at about a four percent dividend yield so it makes sense
for this to land in our dividend portfolio I think that could happen
since it’s undervalued right now it might also make sense in the value
portfolio I’m not sure about the growth portfolio because I think that the
profitability of the revenue growth a lot of that is driven by the commodity
prices and they’re not really in control of that and that scares me from a growth
perspective now the question is what do you think which portfolios do you think
Exxon Mobil should land in and if you haven’t done so already hit the
subscribe button I appreciate you sticking with us all the way to the end
of the video and I look forward to seeing you in the next video thanks

12 Replies to “XOM Stock – is ExxonMobil’s Stock a Good Buy”

  1. I really appreciate your videos, great work. If I can ask, what is a good resource of learning how to do a financial analysis? I would like to do my own research, but I have literally no idea where to start

  2. What do you think of XOM's stock? Is the 4% dividend enough of a reason to buy it? How much do we care about the volatility of oil?

  3. Oil can definitely be volatile in the short to medium term, but it's also an entirely manipulated market. Saudi Arabia and Russia will do everything in their power to keep oil prices within a certain range, so I'd say this makes oil and gas companies even more attractive. With that said, I'm not a big fan of XOM. RDS pays a higher dividend, it's cheaper (as you highlighted), and their future prospects are better because they're focusing much more on natural gas, which has a much brighter future ahead of it than oil. Just a shame RDS isn't in the Dow 30.

    Great video though, as always.

  4. I was focusing a lot on dividend stocks earlier myself this year but now have kind of gotten away from it (don´t put that much emphasis on dividends) as I am fearing significant higher USD inflation in the coming years which would significantly reduce the value of dividends. As for dividend growth energy stock, I personally like entero midstream partners as their dividends can grow a lot in the future.

  5. Great series 👍excellent information, love your presentation. I appreciate your hard work. This channel is definitely a buy and hold long 😎

  6. Excellent work. I am in the O&G industry and you almost sounded as f you knew what you're talking about! (lol – just picking at you). So, is this type of stock one you keep forever? not matter if at some point you may be losing >8% from the price you purchased it – because you have a dividend % providing you with a decent/safe rate? Appreciate to hear your thoughts on this.

  7. Great analysis of the stock, I have been adding more Exxon shares into my portfolio and my dividend yield is keeps going up. People actually do a video on the progress of my portfolio hopefully people help me out through there knowledge by commenting on my video!

  8. as i watch this its late 2019 xom is at 70 It seems the price of oil and xoms investing for future have huret earnings but now would be a good entry point Excellent analysis as allways

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