Even well-run companies are destined to struggle, eventually. There's no way around it, since markets change over time. The best companies manage to muddle through the hard times so that they can thrive in the good times.
ExxonMobil (XOM +0.79%) is a great example of a well-run company that has done just that. Here's proof that it is back on top again.
What does ExxonMobil do?
With a market cap of nearly $500 billion, Exxon is a very large energy company. But it doesn't just produce oil and natural gas. It also moves these fuels through its midstream systems (such as pipelines). And it processes the fuels into usable products in its chemicals and refining business, which is the downstream segment of the broader energy industry.
This is what is known as an integrated model, and it has one very big benefit.
NYSE: XOM
Key Data Points
Oil and natural gas are highly volatile commodities that are prone to swift and dramatic price swings. Companies that just produce oil, known as the upstream segment, generally see huge profit swings.
By adding midstream and downstream assets to the mix, Exxon's diversification within the broader energy sector helps to ease those swings. It doesn't eliminate them, since commodity prices are the main driver of its performance, but the peaks and the valleys aren't as bad.
On top of this, Exxon has a fairly conservative capital structure. Indeed, its debt-to-equity ratio is a very modest 0.14. That would be low for any company, and it affords Exxon a huge amount of leeway to lean on its balance sheet when times are bad.
Adding debt allows the energy giant to continue investing in its business and to continue supporting its dividend. When oil prices rise again, as they always have historically, management pays down the debt it took on in preparation for the next energy downturn.
XOM Debt-to-Equity Ratio data by YCharts.
Built to survive, but also thrive
So, from a big-picture perspective, Exxon is built from the ground up to muddle through difficult periods in the energy sector. That's half the battle, given the sector's volatility.
But Exxon also has a long history of impressive business execution. One way to look at that is by examining its return on capital employed (ROCE).
In the chart below, you'll notice that Exxon's ROCE, the purple line, has spent a lot of time at the top of or near the top of its closest peer group. ROCE examines how well a company is using its shareholder's money. Exxon clearly has a strong history of using it well.
XOM Return on Capital Employed data by YCharts.
Like all companies, it goes through good times and bad times. The 10-year ROCE graph below shows that Exxon started the period at the top of the pack and eventually fell to near the bottom.
But the continued capital investment in its business even during the hard times allowed it to get back toward the top again very quickly. And, today, it sits behind just European peer TotalEnergies on ROCE.
XOM Return on Capital Employed data by YCharts.
All through this period, meanwhile, Exxon's dividend was growing steadily. So, income investors were paid well to wait for the company to get back on its feet. That effort required a period of buying and selling assets to better position the company's portfolio. The dividend yield, for reference, is currently a reasonably attractive 3.5% or so.
If you are a long-term income investor looking to get some exposure to the energy sector, Exxon is a solid choice. And, given its history, it is usually a solid choice no matter what is going on in the energy market.
That said, it will be the most attractive during industry downturns and during periods when its business isn't executing as well as it has historically. So, value-focused investors might want to wait before buying, given that the company's ROCE is industry leading.
Exxon's good times won't last, but the company should be fine
Here's the thing: Its business is performing well right now. That's highlighted by its strong ROCE numbers relative to its closest peers. At some point, it will face hard times again, and that is when the company's real strength will show up. Because if history is any guide, management will hunker down and do what is necessary to get back on track.
This is what makes it a good company, and it's also how Exxon has managed to increase its dividend annually for over four decades despite operating in a highly volatile industry.
