Emerging Tailwinds Set to Push This Oil Major Higher

The 'king of oil,' ExxonMobil (NYSE: XOM  ) has embarked on an aggressive strategy to beef up its unconventional oil assets while divesting itself of low-margin downstream assets. This has been an ongoing project, with the company purchasing 226,000 acres from ConocoPhillips in Athabasca, Canada for $720 million. Despite Exxon's recent poor financial results, this purchase, along with a range of other emerging catalysts, has the potential to catapult Exxon's share price higher over the long term.

Exxon's second quarter results were disappointing
For the second quarter of 2013, Exxon reported some particularly disappointing results for investors. The company's revenue fell by 12% to $96 billion, while its bottom line plunged by 57% year over year to $6.9 billion.  Softer crude prices, lower production volumes and weaker refining margins all affected Exxon's earnings.  A huge contributing factor to this decline was a $7.5 billion gain from divestments and tax related items in the second quarter of 2012, despite the one-of items, earnings still declined by 19%

Production and reserves are expected to grow
It is expected that Exxon will be able to strengthen its financial performance through the remainder of 2013, with production and reserves both expected to grow. This production growth will primarily be derived from its unconventional Kearl oil sands project in Alberta, Canada, which commenced operations in April 2013.

This project is expected to contribute additional production of 110,000 barrels of oil per day, which is a 10 percent increase on Exxon's second quarter 2013 daily production. It is also expected that production at this operation should double by the end of 2015.  All of which further lift production and boost Exxon's revenue.

Recent acquisition of the Clyden oil sands project will boost reserves
Oil sands projects have fallen into decline over the last year because of the high cost of development and increasing competition from cheaper sources of crude. Oil sands production typically offers lower margins on each barrel of oil produced in comparison to conventional oil production. But Exxon has been moving ahead with boosting its unconventional oil presence in Canada.

Exxon recently sealed a deal with ConocoPhilips to purchase its interest in the Clyden oil sands project in Alberta, Canada. As a result Exxon has acquired 226,000 acres of undeveloped land, roughly 93 miles south of Fort McMurray, Alberta for around $720 million. Upon closure of the deal Exxon will own a 72.5% interest in the land through its subsidiary Exxon Canada; Imperial Oil, which is 70% owned by Exxon, will own the remainder.

This acquisition is a natural fit with Exxon's Kearl oil sands project also located in Alberta and may generate some synergies, reducing the overall cost of development and eventually production. It will also boost Exxon's oil reserves and, once development has been completed, further boost production.

Exxon is undervalued
Savvy investors love Exxon because its size and dominant market position make it incredibly resilient to market corrections. Obviously there will be downswings in its value, but historically Exxon has recovered from these while continuing to reward patient investors with a consistently growing dividend.

The best ratios for investors to use when making a comparative valuation of integrated oil majors are enterprise value-to-EBIDTA and enterprise value to proved oil reserves. These allow investors to make an apples-to-apples comparison, and as the table below illustrates Exxon does appear cheap in comparison to its peers, with an enterprise value of six times EBITDA and 16 times its proved reserves.

Company

Enterprise-value to EBITDA

Enterprise-value to Proved Oil Reserves.

Exxon

6

16

Chevron

5

21

BP

6

9

Source data: Exxon, Chevron and BP 2Q13 Financial Filings.

Chevron (NYSE: CVX  ) has experienced similar problems to Exxon with softening crude prices, falling production and weaker refining margins impacting second quarter 2013 earnings. For that period Chevron's bottom line plunged by 26% year over year, with net earnings down to $5.4 billion,  leaving it with some attractive valuation ratios. Although its low proved reserves in comparison to its enterprise value do leave it looking expensive in comparison to Exxon.

But like Exxon, Chevron has focused on building its non-conventional oil reserves, having inked a deal with Argentine government controlled YPF to access the vast shale oil reserves of the Vaca Muerta in Argentina.

BP (NYSE: BP  ) also appears cheap, but there are a range of negative catalysts that continue to affect its performance. For the second quarter of 2013 it saw its profitability plunge with its post-tax result dropping by 25% year over year to $2.7 billion.

Key drivers of these disappointing results were declining production volumes and softer crude prices. Other factors included a stronger U.S. dollar, coupled with Russian ruble depreciation and the lagging effect of Russian oil export duties impacting Russian earnings worse than expected.

Finally, BP is still managing the ongoing fallout from the 2010 Macondo disaster, which has already cost BP $42 billion. It was also forced to increase its provision for litigation costs arising from this disaster by $200 million in the second quarter 2013.

This ongoing litigation, combined with the increasing political risk created by BP's growing dependence on its Russian operations for growth, makes it a relatively unappealing investment.

Exxon continues to reward investors with a steadily appreciating dividend
An appealing aspect of Exxon is the company's steadily appreciating dividend, which was increased in the second quarter to $0.63 per share, or a 10% increase quarter over quarter. This gives Exxon a healthy trailing twelve month dividend yield of almost 3%, creating a compelling reward for patient investors who continue to hold the stock through troughs.

Foolish bottom line
It is clear that Exxon, like its peers Chevron and BP, has struggled with softening crude prices and declining margins in its upstream business. This has been a key trigger for the recent weakness in Exxon's share price, leaving it looking cheap. Over the long term, Exxon should outperform, and the consistently strong growth in the value of its dividend will also continue to reward patient long-term investors.

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