Exxon's Future

ExxonMobil Is Best in Breed
ExxonMobil (XOM: NYSE) By Credit Suisse ($87.19, March 14, 2008)

HAVING REVIEWED THE STRATEGY presentations of the three big U.S. oils, we have concluded that ExxonMobil has the best combination of business momentum, free cash yield and capital efficiency among the group. We are upgrading the stock to an Outperform from Neutral and we are setting a $102 target price.
Our rationale for this upgrade is based partly on the recent disconnect between the performance of commodity prices and the performance of the U.S. Big Oil sector. Oil prices are well over $100 per barrel, suggesting consensus earnings forecasts for the sector need to move up in the near term.
Last week ExxonMobil disappointed some investors with an increase in capital expenditure, but we saw this as more of a mark-to-market and ExxonMobil is still the most efficient re-investor of capital in the business.
There is some inevitability to ExxonMobil's higher upstream capital expenditure: ExxonMobil is in the same industry and in many of the same projects as the other Big Oils. ExxonMobil's costs had been relatively contained in the 2005-2007 period as for projects executed in that timeframe ExxonMobil had pre-bought a significant amount of steel, had contracted drilling rigs at favorable rates and had secured some advantageous construction contracts.
As cost inflation accelerated over the last several years, we think this favorable contracting strategy, plus the underlying execution excellence of the company, had shielded ExxonMobil from the full effect of current pricing. Eventually, however, this protection wears off as older projects are completed and new projects take their place. ExxonMobil is aiming to remain at the top end of industry efficiency measures, but cost inflation finds everyone in the end.
ExxonMobil combines reasonable volume growth to 2010 with the highest operating free cash flow in the industry, and we find this attractive in the current environment. A weaker U.S. refining environment will hurt all of the Big Oils, but ExxonMobil generated only 10% of its net income in U.S. refining and marketing last year, the peak of the U.S. refining cycle, and 2008 will be under 6%.
Continued capital discipline and a focus on return on capital employed are the building blocks of ExxonMobil's high free-cash-flow generation, and the stock is currently exhibiting an attractive free-cash-flow yield, we think. ExxonMobil effectively distributed all of the free-cash-flow in 2006 and 2007 via dividends and share buybacks and at the analysts meeting it was implied that this would continue in 2008 and 2009.
A weak U.S. dollar is helping push up oil prices, and while this puts a dent in headline production volumes, the net earnings effect is positive. Big Oil equity prices have not benefited enough from the 20% increase in the oil price since February.
We think this will change in the near term, pushing up the relative performance of Big Oil versus the S&P 500, and ExxonMobil is our favorite U.S. Big Oil name to play this anticipated re-rating.