ExxonMobil: The Bad News is in the Stock…or Maybe Not

If investors were hoping to hit black gold with ExxonMobil (XOM) this year, they’ve been horribly disappointed.

Associated Press

ExxonMobil’s shares have dropped 11.1% so far this year, after reporting disappointing earnings and declining production. It’s also underperformed both ConocoPhillips (COP), which has fallen 8.5% this year,  and Chevron (CVX),which is off  10.7%, though neither have exactly sparkled this year either.

Argus analyst Michael Burke, however, argues that the market is overreacting to ExxonMobil’s bad news. He writes:

We think that investors have become too pessimistic about the company's production profile (47% gas in 4Q) and that this negative sentiment is reflected in the stock's current valuation. In our view, ExxonMobil will remain the global energy leader, and a superior allocator of capital, as demonstrated by its leading returns on invested capital. We also believe that the company's exceptionally strong financial position, as indicated by its AAA credit ratings, will enable it to return excess cash to shareholders. In short, we believe that [ExxonMobil] will put capital to work in the most productive manner possible, and that it will return undeployed capital to shareholders through dividends and buybacks. Although [ExxonMobil] shares are trading at a premium to peers based on P/E, price/book, and price/sales, we believe that these premiums are warranted given the company's low debt, strong cash flow, and healthy operating margins. Our $104 target price implies a multiple of 12.9-times our 2014 EPS estimate and a potential 12-month return of 19%, including the dividend.

Oppenheimer’s Fadel Gheit and Robert Du Boff think ExxonMobil’s problems could just be starting:

[ExxonMobil], like the rest of its peers, is facing an uphill battle maintaining, let alone growing, its production, as the low-hanging fruit has already been picked. Higher capital spending, rising costs, and increasing government take have squeezed earnings and reduced returns. Lower oil prices could dim [ExxonMobil's] earnings outlook as access to economically attractive energy resources is becoming more difficult and costly. At $90 oil and $5 natural gas, [ExxonMobil] could not internally fund its share buyback, and at $80 oil it has to borrow to fund CAPEX and dividends. We think [ExxonMobil] should abandon setting production targets and focus instead on growing its per-share metrics. In our view, its primary objective should be value, not volume.

Shares of ExxonMobil have gained 0.1% to $89.94 at 1:55 p.m., while ConocoPhillips has risen 0.5% to $64.66 and Chevron has advanced 0.2% to $111.47.