ExxonMobil (NYSE:XOM) is offering investors a 4.3% yield, roughly twice what you’d get from an S&P 500 index fund, backed by 36 consecutive years of annual dividend increases. If that’s not enough to entice you to the name, then consider this: The integrated oil giant’s price to tangible book value of roughly 1.6 times hasn’t been this low since the late 1980s. In other words, Exxon’s stock is cheaper than it’s been in decades and rewarding investors with a fat yield. The best part, however, is that recent quarters show that the future is starting to brighten.
Cheap for a reason
There are real reasons why Exxon’s shares are so cheap relative to its past. The big ones include a notable slide in the company’s return on capital employed (ROCE), a metric that tracks how well it is using shareholder money, and falling production. There’s no question that these are very real issues that investors need to be worried about. And there’s also no question that things are getting better on both counts.
For many years Exxon tended to be toward the high end among its peers on ROCE. After the deep oil bear market that started in mid-2014, however, it slipped into the middle of the pack. That’s pretty much where it still resides. However, Exxon has embarked on a large capital spending program, which it outlined in detail in early 2017. The goal is to more than double earnings by 2025, assuming oil prices remain at around $60 a barrel.
The company intends to put as much as $30 billion per year to work growing its upstream (drilling) and downstream (chemicals and refining) businesses. And, importantly, it plans to take greater control of the projects in which it is involved so it can put its big-project expertise to work. Two of the main goals highlighted in the presentation of the program were improving ROCE and increasing production. Exxon knows exactly what’s bothering investors and is working to fix the issues.
Early results are strong
Exxon’s ROCE is still in the middle of the peer group, but it is starting to pick up along with the broader group. In other words, it isn’t being left behind. And since it’s only at the very beginning of its turnaround effort, there’s likely more improvement to come. The early turn higher is the first sign that Exxon’s investment plans have it moving in the right direction again with regard to ROCE. What’s equally important is that management made sure to point out during its fourth-quarter conference call that it is focused not on improving its internal performance but on targeting industry-leading results. Being middle of the pack isn’t good enough.
As for production, Exxon was able to post sequential increases between the second and third quarters and between the third and fourth quarters. Those production increases were driven by the company’s onshore U.S. drilling operations, which are just one of several key growth initiatives it has going right now. As the other drilling projects come on line through 2025, production should continue to improve. That positive outlook is further backed by the fact that the oil giant keeps expanding the size of its longer-term projects with additional oil discoveries. These are good projects that just keep getting better.
It’s only fair to point out that there’s a long way to go between 2019 and 2025. But Exxon’s early results show that it is delivering on its plan. As the progress continues, investors will likely start to reward the diversified energy company with a higher valuation. Wait too long to jump aboard, and the current low price, and high yield, could be gone.
Really, really cheap
Here’s the thing: Exxon is surprisingly cheap today. For example, its price to tangible book value is nearly 30% below its 10-year average. Chevron (NYSE:CVX), probably Exxon’s most similar peer, is trading at a discount of just 10% or so. The discount is even smaller at other competitors. Exxon’s yield, meanwhile, hasn’t been this high since the 1990s. Not only is the yield desirable on an absolute level, but on a historical level as well. With recent results showing clear progress toward its long-term goals, investors who want to buy one of the world’s best-run oil companies on sale should act now. Eventually Wall Street will realize that the fundamental story at Exxon is back on track.