Buy Exxon Mobil Or Build Your Own Super Major?
Contributor since 2023 / 1242 Followers
Summary:
- This article compares the performance of a $10,000 investment in XOM compared to an ‘alternative’ investment in similar smaller cap companies in search of better returns.
- The smaller peer group comprises of Devon Energy, Pioneer Natural Resources, Marathon, and Phillips 66.
- Performance of XOM is compared to its smaller peers in both shareholder returns, valuation, and price appreciation.
- The pros and cons of this alternate strategy are weighed to determine the best course of action.
zodebala
Thesis
Super major oil companies like Exxon Mobil (NYSE:XOM) or Chevron (CVX) are household names. There isn’t a person you could ask who hasn’t at least heard of these companies. These companies are worth more than the GDP of a small country, and as a result, attract attention from investors and hedge funds from around the world. With all of this exposure, is it possible to find value and/or market beating performance?
In this article, I will compare the performance of a $10,000 investment in Exxon Mobil to the same investment spread amongst smaller sized companies that operate in the same upstream and downstream markets of the oil and gas industry.
To draw a definitive answer, the following questions must be answered.
- Would the results be improved if investing in several companies that compete in the same segments but at a smaller scale?
- Is the difference in returns substantial enough to warrant the time spent actively researching and following several companies?
- Specifically, an alternative investment must prove to generate better yield, better value, and better flexibility to be worthy of our investment dollars.
Ground Rules
I’ll define certain criteria I used to framework this comparison.
1. The smaller component companies are still large companies. A market cap of $20 billion is the minimum to be considered.
2. The second investment will be spread as evenly as possible to match Exxon’s production mix. For example, if 60% of Exxon’s earnings (EBITDA) was from refining, $6,000 would be invested in a refiner. The remaining $4,000 invested in an oil and gas producer.
3. All results will be based on Q1’s returns and annualized for a full year. Returns during 2022 will not be considered since energy prices were largely an outlier from the past 10 year average due to the Russian/Ukraine conflict. This is done to not over inflate the projected numbers. I view Q1 commodity prices as a good barometer for mid-cycle pricing.
The Competition
To facilitate this experiment, I have chosen to compare XOM against a few of my favorite companies in the refining and E&P spaces. For the producers, I have selected producers, Devon Energy (DVN) and Pioneer Natural Resources (PXD). In the refiner space I have selected Marathon (MPC) and Phillips 66 (PSX).
E&P Competition
XOM is a global producer, with major oil and gas projects all over the world. Conversely, the competitors, DVN and PXD, mainly produce out of the Permian Basin of the US. Therefore, there will clearly be operational differences between the companies and this is not necessarily an apples to apples comparison.
Typical Permian production is in the range of 50% oil, 25% NGLs, and 25% natural gas. XOM’s production profile is geared more to the natural gas segment, producing nearly 35% of its production volumes from natural gas. As one would expect, the volumes produced are also significantly different. In Q1, XOM’s total daily output produced 3,831 MBOE. This dwarfs the output of 641 MBOE and 680 MBOE for DVN and PXD respectively.
Aside from these operational differences, the shareholder return packages are structured very differently. XOM employs more of a standard format with a moderate dividend and buyback program. DVN and PXD have altered their programs to match the ebbs and flows of the commodity cycle.
DVN sports a fixed dividend plus a variable dividend that accounts for 50% FCF (exclusive of the base dividend). Buybacks are performed opportunistically beyond this payout. PXD utilizes a similar strategy with a base plus variable dividend that is based off 75% FCF (inclusive of base dividend and buybacks). So right off the bat, investors should be aware of that important difference between the three companies.
Refinery Competition
It might be surprising to some, but domestically, Exxon Mobil is not the largest refiner in the United States. That title belongs to Marathon, coming in at almost 2.8 million refined barrels per day. Exxon follows up at 1.8 million barrels and Phillips 66 at 1.4 million barrels. Globally, Exxon produces nearly 4.0 million barrels per day, so there isn’t quite the same volume disparity on the refinery side as we saw on the producer side earlier.
The competitors in the refinery space have a similar dividend program to XOM but have been pouring an unparalleled amount of cash into buybacks. Record crack spreads have allowed these companies to capitalize on the rapid influx of cash without creating a future liability by ramping up the dividend excessively.
Performance Indicators
Before we get started, let us discuss the indicators we will be using to grade performance.
1. Total Shareholder Returns – This includes dividends and buybacks to demonstrate which investment has superior returns to investors.
2. Valuation – This will evaluate free cash flow generation per share, cash, and debt levels to demonstrate which investment has a superior value.
3. Historical Price Performance – Understanding where we’ve been can help us get an idea of where we are headed.
Through these points, I will look to draw conclusions if there is a superior alternative investment vehicle to XOM.
Total Shareholder Returns
To evaluate our return options, I first had to calculate the percentage of earnings related to each given segment. For XOM, roughly 55% of Q1 earnings came from the upstream segment, leaving 45% spread across the different downstream segments, which can largely be lumped under a refining title.
Below is an annualized summary of dividend payouts and share buybacks from the peer group. It is easy to see that XOM is the laggard of the group in the category.
| Per Share Return (Q1 Annualized) | |||
| Dividend | Buybacks | Combined Yield | |
| Exxon Mobile | $3.64 | $4.20 | 7.60% |
| Devon Energy | $2.88 | $3.22 | 12.49% |
| Pioneer Nat. Resources | $13.36 | $8.51 | 10.6% |
| Marathon | $3.00 | $30.16 | 28.1% |
| Phillips 66 | $4.20 | $7.03 | 11.29% |
I used the following table to calculate the number of shares that would alternatively be purchased. Note that two different companies were selected for both the upstream and downstream segments to give some diversity to the results.
| Downstream | Producer | Price | |
| Investment | $4,521.00 | $5,479.00 | |
| PSX | 45.46 Shares | N/A | $99.44 |
| MPC | 38.2 Shares | N/A | $118.02 |
| DVN | N/A | 112.2 Shares | $48.85 |
| PXD | N/A | 26.55 Shares | $206.40 |
Taking the number of shares in the above table against an equivalent 96.94 shares of XOM (at $103.16/share) generated the following investment options. From this vantage point, it is pretty easy to see there are multiple avenues to achieve an overall return package that is superior to that of XOM. In fact, there is no combination that does not produce higher dividends and higher equity payments than an equivalent position in Exxon.
10-K Reports (XOM, DVN, PXD, PSX, MPC)
Valuation
From a valuation standpoint, it is pretty reasonable to expect that investors will be paying a premium to own a slice of the Exxon brand. But exactly how much of a premium are we paying and how much is that brand value worth?
The first item we will look at is Price to FCF, or investment dollars spent for cash produced. Using the chart below XOM looks to hold its own against other independent producers, narrowly being beat out by Pioneer. The refiners, however, are generating significantly more cash per share. In fact, MPC’s stock costs less than half that of XOM for every dollar of free cash flow produced indicating that it is extremely cheap.
The second item to evaluate will be the cash and debt profiles for XOM. It is no secret that XOM possesses one of the largest piles of cash in the industry, totaling $32.7 billion. But cash alone doesn’t tell the whole story. I have taken the net debt position of all five companies and represented that on a per share basis and a percentage of share price.
XOM is a clear front runner in this area, with producers DVN/PXD coming in at a distant 2nd and 3rd. XOM has a nearly zero net debt position, setting it up for a healthy balance sheet for the foreseeable future. This will provide for a solid foundation to operate from, particularly if we see energy prices recede during a potential recession.
Note: A significant portion of MPC’s debt is tied to ownership of midstream company MPLX and is not directly associated with MPC. Otherwise MPC’s debt position is extremely healthy. I have discussed the merits of an investment in MPC in one of my previous articles.
| PSX | MPC | DVN | PXD | XOM | |
| Net Debt per Share | -$24.88 | -$32.05 | -$8.12 | -$15.99 | -$1.57 |
| % of Share Price | -25.02% | -27.16% | -16.62% | -7.77% | -1.52% |
For our last valuation metric, we will look at historical price performance of a $10,000 investment. In this area, XOM has stamped out a middle of the road performance for share price appreciation over the last 3 years. Investors may also find some comfort that XOM displays the lowest beta of the group coming in at 1.08 to generally follow the broad performance of the general market. In contrast DVN has the highest beta of 2.34.
Risk
The comparison performed here has focused purely on stock performance and does not take into account any operational characteristics such as quality of assets, growth aspects, or management performance. As a result, it does not give credit to XOM for its incredibly diverse set of projects that span the globe.
The resources at Exxon’s disposal are unparalleled. The shear amount of cash flow and cash reserves give the company the capability to find and develop the world’s next major reservoir. Simply put, XOM has the capability to be an industry trail blazer.
Conversely, the smaller peer set does not have this ability. In the big picture, they are optimizers, seeking to be as efficient as possible in the Permian, while XOM is out scouring the globe for big pay days.
There are both pros and cons to this approach. Even though big pay days excite investors and can drive record profits, this is also the status quo for a super major. It is a tall bar to constantly live up too. Making big splashes is the only method to drive meaningful growth for a company worth over $400 billion. It takes major developments in places like Guyana to move the needle on the behemoth that is Exxon.
Summary
In this article we compared the stock performance of Exxon Mobil against a variety of both independent oil and gas producers as well as leading US based refiners. To draw conclusions from our comparison, we tried to answer three questions.
- Would the results be improved if investing in several companies that compete in the same segments but at a smaller scale?
Conclusion: The analysis showed that any combination of the four companies discussed in this space would generate higher yield and a higher level of equity returns through share buybacks.
- Is the difference in returns substantial enough to warrant the time spent actively researching and following several companies?
Conclusion: The analysis showed that it was possible to obtain shareholder returns in the range of 2 to 3 times that of XOM. XOM has proven to be a middle of the road performer of the group when it comes to price appreciation over the last three years. Therefore, the alternative investment should adequately compensate investors for their additional time.
- Specifically, an alternative investment must prove to generate better yield, better value, and better flexibility to be worthy of our investment dollars.
Conclusion: XOM trades at a premium valuation compared to three of the four competitors and was shown to generate the lowest amount of shareholder returns of the analyzed group. Further, having an investment in my ‘alternative’ approach allows investors to choose the return profile that best meets their needs (buybacks vs dividends), or adjust as one ages.
The downside to this approach will preclude investors from benefiting from XOM’s excellent balance sheet as well as the diversity of world class assets. From a long-term vantage point, XOM’s vast resources almost guarantee it will be at the forefront of the industry for the foreseeable future. These two factors can provide an ample amount of security that an investor may wish to consider.
When selecting an option, both age and financial goals come into play. After weighing both options, my personal preference would be to select any of the alternative investment options. Does this require additional work us as investors? Absolutely. However, in principal, we can be rewarded with both higher dividends and buybacks. XOM still has merit as potentially a more secure and less volatile investment should that be a goal for the current season of your life.
If this thought process has caught your interest, I have written individual analyses on all four of the “alternative” companies discussed in this space for further research.
Happy Investing.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of DVN, PSX either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.