October 12, 2016 - 12:01am EST by
2016 2017
Price: 87.75 EPS 2.54 4.37
Shares Out. (in M): 4,146 P/E 34 20
Market Cap (in $M): 363,812 P/FCF 30 20
Net Debt (in $M): 40,113 EBIT 17,180 29,760
TEV ($): 403,925 TEV/EBIT 24 14
Borrow Cost: General Collateral

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The decline in interest rates over the past year has driven investors to value the dividend yields of high quality U.S. businesses quite dearly.  Interestingly, their affection has spilled over from companies with stable and enduring brands in strong competitive positions to XOM, which is a capital intensive, cyclical, and depleting business.  Exxon Mobil is valued today at approximately 34x earnings and seems likely to underperform the S&P 500 stock index (valued at ~20x) and especially some of its other large high quality components like JPM (12x earnings) over time.  This relative value disparity underneath the surface of the index seems stark.


Exxon Mobile is a giant company and its historical financials aggregate dozens of major assets across oil & gas, chemicals, and refining.  In a nutshell, upstream has historically generated 66%+ of XOM's net income and is predominantly international and oil-driven.  Refining generated ~20% of historical earnings and chemicals ~ 10%.

Historical figures:





Refining companies in the US today are trading < 10x earnings.  Let's value XOM's refining business conservatively (From the short side) at 12x 2008 earnings, which is the highest of the past 9 years other then outlier year of 2012 when there was major supply disruption.  This is worth $98B, or $23.62 per share.


Chemical companies in the US are trading between 10 and 15x.  Let's use 15x the best year of the last 9 years (2010).  That's $74B, or $17.76 per share.

Overhead is running $2B per year.  At 15x, that's worth negative $6.80 per share.


So before getting to upstream, we have roughly $34.58 of value per XOM share vs. $87.75 share price.  Is the upstream worth $50 per share?  In the past 12 months, upstream made $2.4B at $45 oil and $2.60 gas, or 57c per XOM share.  Let's assume that is trough earnings power (although these numbers are not far from current energy prices).  In the peak conditions of 2014, with oil averaging $86 and gas averaging $3.75, XOM made $27.5B, or $6.60 per share.

So the market is valuing upstream at something between 100x trailing earnings (let's assume trough) and 7.5x peak earnings.  Let's split the $25B of earnings difference and assume oil/gas recovers overnight  and XOM makes $15B, or $3.60 per share.  Using the generous assumptions on the refining and chemicals side of the business, the upstream "Stub" would be valued at $50 / 3.60 =  14x

These multiples suggest to me that rates are working heavily on this stock.  XOM appears positioned to lag the market in many scenarios:  rates rise, oil and gas don't rally sharply, recession, etc.

Worth nothing that despite XOM's borrowing capacity they used 100% stock to purchase IOC.  That indicates a non-dear currency. 







I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.



oil and gas

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