Is ExxonMobil Corporation Coming Around? 3 Reasons to Like the Stock

Over the past few years, ExxonMobil (NYSE: XOM  ) has not been the favorite of savvy investors. It has either been loved or hated. Those who like ExxonMobil point to the company's consistently high return on capital employed and rightly claim that ExxonMobil has the best capital discipline in the business.

And while ExxonMobil's dividend may be low when compared to peers such as Chevron (NYSE: CVX  ) and ConocoPhillips (NYSE: COP  ) , fans of ExxonMobil claim that, when buybacks are considered, ExxonMobil's return on cash to shareholders is often superior to that of Chevron or ConocoPhillips.

Source: YCharts

The above chart is pretty much all the evidence the skeptics need. Over the last five years, ConocoPhillips and Chevron have greatly outpaced ExxonMobil. It's no coincidence that returns over the last five years have a strong correlation with production growth over that same period.

Skeptics of ExxonMobil's strategy, and I've considered myself one up until recently, point to a couple of things: ExxonMobil's lackluster growth and the fact that the company has thus far largely missed out on the 'shale revolution,' which has breathed new life into oil companies large and small.

Furthermore, ExxonMobil's massive acquisition of America's largest shale gas driller, XTO Energy, hitched ExxonMobil's fortunes to domestic dry gas just before the price of natural gas plummeted. But I think that ExxonMobil's fortunes may be changing over the next few years. The domestic natural gas picture is steadily improving, and ExxonMobil has recently made some interesting moves; albeit a little late.

Courtesy of Vanguard Natural Resources, Investor Relations

Largest gas producer in the U.S.
ExxonMobil is now the largest dry gas producer in the United States. Despite the fact that supply of dry gas has outstripped demand in most years since 2009, thanks largely to the shale gas boom, demand is expected to exceed supply by 2017, according to the chart above provided by Vanguard Natural Resources. As demand for inexpensive and relatively clean natural gas increases, the fundamentals for this fossil fuel improve over time. Of all the big U.S. oil companies, ExxonMobil stands to benefit the most from increasing usage of natural gas.

Highest return on capital employed
ExxonMobil has the highest return on capital employed, not only for this year but also for an average of the last five years. ExxonMobil's closest peer is Chevron at about 14%. Other "super-major" peers such as Royal Dutch Shell and Total struggle to hit even 10%. While ExxonMobil may have missed the boat on oil production growth over the last five years, there is no denying that the company's financial discipline is the best in the industry.

Acreage swap in the Permian
ExxonMobil has finally joined the shale oil bandwagon. In a deal with Endeavor Energy Resources, ExxonMobil gained operating rights on 34,000 acres in the liquids-rich Wolfcamp formation. In the agreement, Endeavor will continue drilling for shallow oil while ExxonMobil and XTO drill and operate deeper horizontal wells.

The Wolfcamp formation is now expected to be America's No. 3 shale play, behind the Eagle Ford and the Bakken, but some estimations now list the Permian Basin as the No. 2 oil field in the world. If that ends up being the case, ExxonMobil will be glad to have gotten in on shale drilling in the Wolfcamp. While ExxonMobil is by no means an early mover in this play, or in shale oil in general, this move is better late than never.

Bottom line
Relative to the other two 'big oil' names, ExxonMobil's stock has not performed well over the past five years. During this time period, oil production growth has been the chief catalyst for higher equity returns, and I believe it will continue to be.

Thankfully, ExxonMobil is finally making a move into the Wolfcamp shale play, and this move is by no means too late. In addition, the company's fortunes will be bolstered by improving fundamentals in the domestic dry gas market. I believe that ExxonMobil's next five years will be better than its last.

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