ExxonMobil (NYSE:XOM) shareholders have good reason to be frustrated. Among the five largest oil and gas companies in the world, referred to as supermajors, it's the only one that has lagged the total return (stock performance plus dividends) of the S&P 500 in the last three years. In fact, the stock's total return of 8% is far behind the 55% rise of the index in that span.

The performance is all the more surprising considering North American refining margins have been healthy for much of the past three years. But management believes the business will thrive thanks to its strength downstream. When coupled with a steady ramp-up of upstream projects in the coveted Permian Basin, it could help pull the business out of the doldrums. Does that makes ExxonMobil a buy?

Oil tankers at port.

Image source: Getty Images.

Is the sluggish growth strategy finally picking up?

While most peers have already begun to realize significant contributions from recent growth projects, it's taken ExxonMobil a little longer to get warmed up following the oil price crash of late 2014. Upstream production growth was difficult to come by for the business in 2018, but it exploited healthy refining margins in its downstream refinery network. The downstream segment saw fourth-quarter 2018 earnings rise to $2.7 billion, up from just $952 million in the year-ago period.

Healthy downstream operations should continue for the foreseeable future due to a confluence of factors, including cost-advantaged North American crude inputs, a new low-sulfur fuel requirement for shipping vessels going into effect on the first day of 2020, and various investments in infrastructure to adapt to expected demand surges in specific petroleum products, such as synthetic lubricants.

ExxonMobil will be well-prepared for growing demand for low-sulfur marine fuels after upgrading its complexes in Beaumont, Texas, and Rotterdam, Netherlands, by the end of 2019. Meanwhile, the business is well-positioned to leverage its salivating upstream assets in the Permian Basin. The acreage position underpins plans to triple upstream segment earnings between 2017 and 2025. 

The company boasts 1.6 million acres in the Permian Basin, with an estimated net recovery potential of 9.5 billion barrels of oil equivalent. Two-thirds of that production potential is packed into the Delaware Basin formation, which is currently home to less than half of its active rigs in the Permian Basin. Successful development would allow the supermajor to take advantage of its extensive refinery infrastructure along the American Gulf Coast, which could result in supercharged growth potential by the mid-2020s.

Oil being poured into an engine.

Image source: Getty Images.

By the numbers

ExxonMobil reported solid full-year 2018 operating results. The business delivered operating cash flow of $36 billion, its highest total since 2014 (oil prices collapsed later that year), although it's only half of what management thinks could be possible by 2025. It saw full-year 2018 earnings rise 6% compared to the year-ago period to a healthy $20.6 billion. Capital expenditures rose 12% year-over-year, which could become the new normal as the business ramps growth investments.

Despite finally seeing contributions from growth projects of years past, ExxonMobil shares don't look too attractive on several key valuation metrics -- including forward earnings, PEG ratio, and enterprise value (EV) to EBITDA -- compared to supermajor peers.    

Company

Forward PE

PEG Ratio

EV to EBITDA

Dividend Yield

ExxonMobil

14.4

1.20

7.5

4.2%

Royal Dutch Shell

10.0

1.71

5.8

5.9%

Total

9.1

21.1

5.5

5.2%

Chevron

14.9

0.43

7.7

4%

BP

10.3

0.40

5.8

5.8%

Source: Yahoo! Finance.

As the table above demonstrates, ExxonMobil might be the least attractive supermajor based on the selected valuation metrics. It's expensive relative to future earnings expectations and EV. Its dividend, while above average compared to the broader stock market, fails to impress when ranked against peers. Simply put, investors looking to play growth in the Permian Basin, or own an oil supermajor, could do better.

Energy investors may want to pass on this supermajor

Investors looking for ExxonMobil stock to catch up to peers in the near future may be disappointed. The business expects to plow at least $30 billion per year into new projects and growth initiatives, which will likely weigh on its cash flow for the foreseeable future. Meanwhile, the company's valuable acreage in the Permian Basin might still be a few years away from delivering closer to its full promise, especially considering persistent infrastructure constraints.

That said, if the business can deliver on its strategy in the next five years and successfully ramp up growth projects, then patient investors should be rewarded by the mid-2020s. But the bottom line is that there are simply better investments in the market right now than ExxonMobil.