Exxon ValueLine Outlook

Exxon Mobil is powering ahead. Fueled by rising oil prices, earnings may be headed for another record year in 2008. Further per-share gains could be realized in 2009 and out to early next decade, if the oil market remains supportive. The run-up in oil prices is not all roses. Higher feedstock costs at the refineries and chemical plants have taken a toll on results in those lines. Falling gasoline demand is another problem. But the boom in profits from the exploration and production division is more than making up for the weakness downstream. A dip in oil production highlights why that fuel has become so costly. Exxon Mobil pumped 10% less oil in the first quarter of 2008, due to the loss in output from Venezuela, the effects of production sharing contracts, and declines from mature fields. Oil traders have bid up quotations as much as they have partly because industry stalwarts, such as Exxon Mobil, are unable to boost volume. The big move in oil prices more than offset the dip in volume. But even though this wasn’t slated to be an especially good year for production, investors were disappointed by the extent of the falloff. The overall production picture is not as bad, when natural gas is included. Exxon boosted its gas production slightly in the first quarter, so that combined output fell about 6%. There is still promise that results will pick up in the years ahead. Spending is up 20% this year, and will very likely remain in a high range in the coming three to five years (partly to offset cost inflation). A dozen large projects are due to start up in 2008, and more are scheduled further down the line. That translates into modest volume potential, although any supplies held back by host nations, owing to high oil prices, undermines those possibilities to an extent. The stock is well ranked (2) for Timeliness. The shares are a good way for conservative investors to take part in the oil boom, given Exxon Mobil’s top (1) Safety rank. Risk-adjusted total return potential to 2011-2013 is adequate in view of the equity’s top quality. Large, ongoing share repurchases provide an underpinning for the stock. Steady dividend increases will also help.

Robert Mitkowski, Jr. June 13, 2008