ExxonMobil (NYSE:XOM) doesn't get a lot of respect in today's market as its heavy spending to boost production has yet to generate notable improvements. That could be about to change. Here are a couple of reasons why dividend investors might still find Exxon of interest, despite the ugly image.

Down but not out

Despite a dirty image that has ESG investors rooting for the demise of oil and natural gas, Exxon and its peers are very clear that they believe the market for commodities will remain a vital one for many years. Simply put, people around the world are still demanding these easily portable and well-supported fuels. That, however, doesn't change the fact that oil and natural gas are both selling at relatively low prices today, putting pressure on profits throughout the energy sector. And then there's the not-so-glamorous fact that Exxon's production has been declining for a few years. 

A woman drawing a risk vs reward graph

Image source: Getty Images.

To put some numbers on that last point, Exxon's oil equivalent output dropped 1% year over year in 2016. It fell another 1.7% in 2017. Then it declined again in 2018, this time by 2.6%. And while 2019's final results aren't in yet, it's unlikely to be a year of robust growth. But there was an important inflection point made during the year, with year-over-year growth resuming on a quarterly basis as the year progressed.   

Despite that important shift, Exxon's stock remains a laggard relative to the broader market and many of its peers -- and on an absolute basis. For example, over the past five years Exxon's stock, off by around 23%, lags well behind most of its closest peers. The underperformance is noteworthy, since the next worst performer, Royal Dutch Shell, was "only" down about 7% over the span. The S&P 500 Index, for reference, was up about 60% over the period.

Weak production is one piece of the puzzle, but there's another: The money the company is spending to boost production (up to $35 billion a year) hasn't materially improved Exxon's return on capital employed numbers (ROCE). That's basically a measure of how well the company is using its shareholders' capital. Where once Exxon was an industry leader, it now sits below many of its peers. 

But these problems actually set up a potential opportunity for value-conscious investors, particularly those with a flair for dividend stocks. For example, Exxon's 5% yield is near a 30-year high. The company's price to tangible book value is near a 40-year low (though roughly in the middle of the pack relative to peers). In other words, historically speaking, Exxon looks cheap.   

Is it cheap for a reason?

To some extent, Exxon's relatively weak stock performance is understandable. The often volatile prices of oil and natural gas are key drivers of its financial performance, and the prices of these commodities have been low and volatile lately.Production declines and weak ROCE numbers are also not something that energy investors like to see. A lack of enthusiasm makes complete sense. 

However, there are a number of reasons to be positive to which investors may not be paying enough attention. For starters, Exxon continues to have one of the strongest balance sheets of its oil major peers despite being in the middle of a material investment program. In other words, it has the financial strength to weather a weak market and continue to invest for the future.

That said, the investments Exxon is making are starting to show results. As noted above, its production appears to be turning a corner. That, however, has come on the strength of just one of its big projects -- onshore U.S. oil drilling. To put a number on that, production from this business increased a massive 73% year over year in the third quarter of 2019. And that's just the start, as management still expects to more than double production from current levels by 2025. So there's still a lot more growth to come here.     

ExxonMobil Year-Over-Year Production Growth

2016

2017

2018

1Q 2019

2Q 2019

3Q 2019

-1%

-1.7%

-2.6%

2%

7%

3%

Data source: ExxonMobil   

Then there's the fact that one of the oil giant's big offshore projects, located in Guyana, came online in late 2019. This happened too late in 2019 to have a material effect on the year's production numbers, but it should provide a notable boost to 2020's results. In the near term the output from this region is expected to be around 120,000 barrels per day. However, that number is projected to increase six-fold by 2025 as additional wells in Guyana get drilled. In other words, like the company's onshore U.S. production, it looks like a multi-year period of growth is just starting to take hold.    

Behind these two projects are new upstream opportunities in Brazil, Mozambique, and others. So, after a few years of weak production numbers, Exxon appears to be on the verge of an upturn. That may or may not show up in 2019's production results, but the change of direction is very likely to become increasingly apparent in the very near future. And the trend will probably continue for several years. And as the exploration (read spending) phase on these projects gives way to the production phase, it is reasonable to expect Exxon's ROCE to improve, as well. Oil and gas prices will continue to be the driving force at Exxon, but investors are still likely to take a different view of the stock once production gets back on a growth track.   

A position of strength

While it's true that Exxon probably won't see a big stock gain without an oil rally, it is clearly making progress in turning its production around. That progress will begin to show up more notably in 2020, as a second big project comes online. Investors are likely to rethink their dour view on this energy giant as that happens, especially if an upturn in ROCE follows. There are still all sorts of reasons to dislike Exxon (such as the environmental impact of using carbon fuels, for ESG investors), but it is remains attractive for those who like to buy stocks when they are on sale. That's augmented by the fact that there's a positive catalyst on the horizon that should help it earn some love from investors. If you wait too long, though, you might miss out as Wall Street catches up to the good news developing at Exxon.