hey YouTube I'm Jimmy in this video I'm gonna walk through my analysis of Exxon
Mobil ticker symbol XOM this continues our series where we're analyzing all 30
stocks in the Dow Jones Industrial Average once we're complete with our
analysis we're gonna build three different portfolios a dividend portfolio
a value portfolio in a growth portfolio this is the eleventh video in that
series and you can see a link in the description below to all eleven videos
now I put the link to the chevron video first because Chevron's also in the oil
and gas industry and this is a highly competitive industry and in that video
we went through the industry the analysis comparison between Shell
Chevron and Exxon Mobil and I'm not really going to touch on much of that
here in this video we're gonna focus more on the factors that influence Exxon
as a business so Exxon focuses primarily on the upstream and downstream market
the upstream market is when oil and gas gets extracted from the ground
downstream is when they refine it and they sell it at gas stations things like
that and it's important to know that Exxon has always been known as great
executors throughout their business particular in the upstream segment now
there are a few key measurement tools that we can use to see how the energy
business as a whole is doing we can use the most obvious one is the price of oil
the price of gas and then you have a rig count which helps gauge upstream
activity then you can look at the crack spread which helps gauge downstream
profitability so for now why don't we kick it off with a chart of oil now this
chart goes back about five years and you may remember that this big dip here this
is back in 2015 but what's interesting to me is that when we shorten up the
timeframe from five years to a bit over a year well we can see that the price of
oil has been down recently now this chart this is a chart for WTI which is
oil that comes out of West Texas you may have also seen quotes for Brent oil
Brent oil is a quote for oil prices that come off come out of the North Sea off
the coast of England typically Brent oil is world oil WTI is American oil but
they act very similarly to each other as you could see here another interesting
metric to look at is the rig count the most popular indicator for rig counts is
the Baker Hughes rig count here's what that chart looks like the
orange line is oil the blue bars are rigs a rig is what they use to extract
oil and gas from the ground the rig count measures all active oil and gas
rigs in the United States and Canada So the theory being the more rigs that
are being added well the more confident the industry is in let's say the price
of oil the price of gas the more optimistic they are that if they put
this rig up they're going to make money with it
so that should be positive for the industry although the effects of a
rising rig count isn't necessarily black and white as we can see rigs have
trended higher recently and more rigs implies a higher confidence but more
rigs leads to more production more production means that there's going to
be a greater supply of oil and gas in the market which in theory will drive
the price lower falling prices would lead to less profitable rigs and that
means that in theory the industry is not going to put up as many rigs so I don't
think that the recount is terribly clear as a predicting tool at least in the
short term but now where this could be very useful is if we were trying to
build a full valuation model if we knew how many rigs were going up and then we
could get the average price of oil and gas hypothetically we could use that
information to create a better forecast for revenue and profits now if we were
doing that we'd also want to know how Exxon was doing in their downstream
business and for that we could use something like their refinery throughput
throughput is a measure of how much crude oil exxon mobil can refine
basically what's their capacity now to tie this all together this chart is very
helpful this chart is capacity utilization so this tells us if you look
at the tall middle bar we can see that a bit over 93% of their available capacity
was used the higher the number the better for capacity utilization okay so
now how do we value Exxon and should we add it to any of the portfolios first off
their dividends are pretty good and rather reliable their current dividend
yield is about four percent so that's good to know and but
we also know that the price of oil has fallen recently so let's see what
analysts think about revenues and profits going forward okay so here's a
chart of revenue the green bars are estimates and it looks like analysts are
expecting a dip in revenue going out to 2020 and 2021 when we look at earnings
per share we can see the same thing now a lot of these projections will have to
do with the price of oil when we when oil went down back in 2015 we can see
that that had a lasting impression on earnings per share now if you saw our
Chevron video you may remember that one of the things that we uncovered was that
the downstream segment for oil and gas companies tends to be a large driver of
revenue but not an enormous driver of margins now one of the things we can do
to gauge how margins are being driven is by looking at something called the crack
spread basically in refining the process of refining includes cracking oil
crude oil and breaking it down into things like gasoline heating oil diesel
jet fuel things like that well this chart this is the Cushing three-two-one
crack spread the crack spread can be used to project refining margins and
there are a whole bunch of different crack spreads that could be used but in
this example the three two one crack spread it assumes that for every three
barrels of crude oil brought into the refinery two barrels of gasoline are
produced and one barrel of distillate is produced to sum it up basically what it
means the higher the crack spread the higher profit margins should be okay so
now we know oil has been on a steady decline recently the crack spread has
pulled back a little bit but overall it still appears to be in the same general
area it has been over the past few years so the real question is how can we try
to come up with a fair value for ExxonMobil so once again as I said in
the Chevron video I'm a big fan of enterprise value to EBITDA for these
types of companies p/e tends to be a bit too volatile and when we look at the
volatility of energy prices that makes PE very difficult to use where EV to
EBITDA on the other hand is a bit more stable and I think it's great for oil
and gas companies and it's very popular among analysts so I think that
confirms it's at least as stability of it so now the first question is what's
exxon's current EV to EBITDA multiple so currently Exxon is trading at a forward
EV to EBITDA of about 6x so where should it be
well when we look at Exxon's 3 year average it's about 9x their five-year average is
about 8x so according to their own history it looks like Exxon may be
undervalued how about their competitors well Chevron is currently trading at a
forward EV to EBITDA of about 5x while Royal Dutch Shell is trading at about 6x
so according to their peers it would seem that Exxon might be slightly
overvalued but you may remember in the Chevron video that Exxon's business is a
bit more stable than both Chevron and Shell this was the chart that I showed
in that video and this orange line this is Exxon's profit margins and as you
could see despite the collapse in oil back in 2015
Exxon remains positive meanwhile Shell lost money and so did Chevron so with
this in mind it makes sense to me that Exxon would be trading at a premium
relative to peers so now the question is which multiple is the best multiple to
use so when we think back to the price of oil we know that it's fallen recently
so has the crack spread now if we go back to this 5-year chart of oil we can see
that this chart this five-year chart includes oil above $100 a barrel a
collapse of recovery and the current pullback that were in so to me using a
5-year average for our EV to EBITDA multiple would incorporate all this
craziness in there so to me that is a reasonable multiple to use another
reason I like it is it is lower than the three-year average which implies a more
conservative approach which I'm okay with
so if Exxon was trading at its own five-year average of 8 X now that 8 X
was actually 7.75 X I just rounded it but to me to be more accurate I'm gonna
use the 7.75 X for our calculation now EBITDA over the next 12 months is
expected to be about fifty nine billion dollars giving us an enterprise value of
a bit over 464 billion now all we need to do is
subtract debt net debt was about thirty nine billion dollars dropping the fair
value of our equity to about four hundred twenty five billion divide that
by the shares outstanding and we get a fair value of about a hundred dollars
per share now given that the current stock price is about eighty dollars per
share it seems that Exxon could be a good buy
in this area for a long term portfolio now if we add this to one of our
portfolios we have to be ready for oil to keep collapsing and we know that over
the short term it might look like Exxon's a good buy right here but we
also know that energy companies aren't in control generally of the price of oil
so if it keeps falling we have to be ready for them to keep falling with it
now we already mentioned that Exxon has a pretty good dividend at about a four
percent dividend yield so it makes sense for this to land in our dividend
portfolio I think that could happen since it's undervalued right now it
might also make sense in the value portfolio I'm not sure about the growth
portfolio because I think that the profitability of the revenue growth a
lot of that is driven by the commodity prices and they're not really in control
of that and that scares me from a growth perspective now the question is what do
you think which portfolios do you think Exxon Mobil should land in and if you
haven't done so already hit the subscribe button I appreciate you
sticking with us all the way to the end of the video and I look forward to
seeing you in the next video thanks