Should you follow Warren Buffett's latest news-making stock pick? Some say yes, some say no, but Warren seems confident in ExxonMobil's (NYSE:XOM) future as his Berkshire Hathaway (NYSE:BRK.B) just purchased ~40 million shares of the oil giant.

Not the first time
Buffett invested in ExxonMobil back in 1984, but he then ended up selling in 1985 for a 44% gain. Buffett was right once with ExxonMobil; is he right this time?

Why Exxon?
Looking at Exxon's latest quarter, one might be confused or reassured with Buffett's purchase. Berkshire Hathaway is a big company, but its investors want to be sure its capital is being put to good use. 

ExxonMobil posted an 18% drop in earnings year over year, as downstream margins were negatively affected by declining gasoline prices and increased capacity. This may have some Berkshire investors wondering what Buffett is thinking.

Well Buffett might point toward ExxonMobil's total production growth of 1.5% year over year. Excluding certain items, production was up 2.7% with liquids production rising 5.3%, while lower-margin natural gas production was down 0.3%. Higher levels of liquid production also help to justify ExxonMobil's 15% increase in capital expenditures to fund future growth projects.

Over the next few years as the macro picture improves, Exxon should be able to look forward to higher gasoline prices, which will increase its downstream earnings on top of its production growth.

Maybe Buffett sees higher output and gasoline prices in the future, making Exxon a long-term value play at 11.8 times forward earnings, which is ~23% cheaper than the market. Exxon's dividend is also larger than the market, which adds to the value case. Buffett's holdings through Berkshire Hathaway are focused on long-term value, one of the reasons he has beaten the market for so many years.

How will Exxon keep growing its production?
ExxonMobil plans to increase its dividend through higher output, but just how will Exxon increase its output to reward investors like Berkshire?

Exxon has 25 billion barrels of proven oil equivalent reserves, with another 27 billion boe in reserves under development. Further out, ExxonMobil eyes a potential 35 billion boe in recoverable reserves through new projects. Part of the long-term story for Exxon is that it will be able to easily replace its output with more reserves being uncovered, so it won't run out of places to drill and production can keep increasing.

With 31 major projects under development and construction between 2012-2017, Exxon is going to look under every rock possible to find oil and gas. While Exxon isn't a growth story, it does have the potential to increase value for shareholders through more buybacks and dividends. In Exxon's latest quarter, it spent $5.8 billion trying to reward investors like Berkshire Hathaway through dividends and share repurchases.

Past, present, future
Had Buffett held on to his ExxonMobil shares purchased in 1984, he would have seen a return of ~2,000% to date. While I doubt ExxonMobil will see another run like that, there are catalysts. As China and India urbanize their populations and more people get cars, Exxon will have a strong source of demand for decades.

Urbanization (among other things) will lead to a 0.8% increase in oil demand per year through 2040, with gas demand increasing by 1.7% annually during that same time period, according to Exxon. ExxonMobil plans to export North American gas through LNG export terminals to capitalize on this growth while maximizing returns through lower input costs from cheap U.S. natural gas prices.

To fulfill global oil demand, Exxon plans on using anything from U.S. shale to Canadian oil sands to offshore drilling to pump out more crude.

Final thoughts
Buffett is well known for his long-term outlook in regards to his investing style, so he must see rising demand and higher levels of output fueling the Exxon value story.

As ExxonMobil's free cash flow grows, it can be translated into more share buybacks and dividend increases. Berkshire Hathaway's investment is a strong vote of confidence from Wall Street for ExxonMobil's long-term plan, but the company will need higher gasoline prices to salvage downstream margins and grow earnings.