hi I'm Jimmy in this video we're looking at Exxon Mobil stock ticker symbol XOM
the goal of this video is to try to better understand Exxon Mobil's business
and then see if we can value Exxon Mobil stock using a discounted free cash flow
evaluation technique now I'm reviewing this particular company because it came
as a suggestion from one of the learn to invest members they joined the learn to
invest community and then that community voted on which companies we should do
ExxonMobil is the company that won so here we are
okay so let's jump right into their business so Exxon Mobil's business can
broadly be broken into three main segments downstream is the largest that
represented about 80% of their 2019 revenue then their chemical segment came
in at about 11% of their revenue and then finally their smallest segment was
their upstream business that brought in the final nine percent of revenue okay
now for curious the upstream business is where Exxon or really any company in
this industry it's where they drill for oil and gas so the huge this is where
the huge drop in oil prices are going to first get hit this is the part of the
business that's their first gonna hit and then their downstream business well
that's where we would see refining or their gas stations or even if we bought
a quart of let's say Mobil one oil well this revenue would all be accounted for
in their downstream segment now if we were looking at the industry in general
we might also see a segment called midstream midstream is where oil and gas
is shipped from so pipelines barges things like that and where it's stored
and excellent doesn't seem to break out their midstream business even though
they do have some midstream typically defined as midstream operations they
roll that into part of their downstream business so that helps explain at least
partially why their .. why their revenue is so relatively large in this
particular segment then their final segment is chemicals now this segment is
a nice complement to the other two segments all three of them interchange
quite nicely they all work together if they complement each other quite nicely
and then this segment also produces things that are used in things like
rubber and plastics but let's go on and on as far as what their chemicals
business brings to the table okay now it's so quickly how Exxon has
been impacted by the corona virus and the obscene volatility that has taken
place in the energy markets particularly oil so just recently Exxon amount on
they announced their first quarter earnings for 2020 and they posted a loss
for the first time in a while and I'm sure that for many of us this was
expected but some of that loss was tied to writedowns that Exxon Mobil had done
which in theory were just one-time write downs so many times
analysts adjust these earnings to account for the fact that some of those
impairments shouldn't happen again so if we would just this chart and replace it
with adjusted earnings well this is what the new chart would look like and now
adjusted earnings for the first quarter of 2020 is slightly positive although
they are expected to go negative in the first in the second quarter of 2020 so
I'm not sure that anybody's too surprised that things would be negative
at this point for most energy companies whether we want to adjust it as frankly
somewhat unimportant at this point especially since the real problem
for a lot of these companies is that oil has been more than halved since the end
of 2019 and we may look at this chart and say it looks like something's wrong
with this chart I distinctly remember hearing that oil prices went negative
not too long ago yet this chart doesn't seem to show any sign of that and if
you're curious to better understand that I actually did a video just recently
where I looked at the US oil fund and I took a moment to explain how this
happens this is the correct chart for oil but the price for a negative oil
won't show back up in most oil charts if we were to look at something like Yahoo
fine it's not going to show up but I explained that in a video below if
you're curious okay but for now let's shift back to ExxonMobil so let's look
at some of the key points coming out of the most recent earnings report and then
we'll see if we can value Exxon Mobil stock using a discount discounted free
cash flow valuation method so first clearly their upstream business has been
significantly hurt and that has been expected there is a huge oversupply in
oil and when we pair that with a huge decrease
global demand for oil since much of the world's been on lockdown well that's
really hurt their upstream business then second their downstream business got
hurt for the very same reasons there's been a huge drop-off in demand for jet
fuel and gasoline then excellence chemicals business well they actually
did quite well they had some improvements in margins which is a good
sign for their business but when we saw this chart before
unfortunately the gains in the chemicals business has gone a bit unnoticed sins
it represents a much smaller percentage of their overall business now a bright
note for Exxon is that they have been continuing to build to continue to add
to their portfolio of oil and gas properties to try to strengthen their
overall position so they have a better chance of returning to profitability
once the markets recover however long that takes I've said an advantage of
being an enormous company like that ok now this brings us to Exxon Mobil's
dividend right now excellence Mobile's dividend their yields is about 8 percent
which is crazy high and Exxon Mobil's management has stated that they want to
maintain that dividend and it's a priority for them to continue to improve
that dividend so we can see what their annual dividend history that Exxon has
been consistently a solid dividend payer and if we believe that oil is going to
recover at some point over the next couple of years let's say well this
could the their dividend could in fact be one of the factors that sway many
investors and I think at the current price their dividend yield looks very
very appealing ok so their dividend looks interesting
and that's great but what do we think is the fair value for Exxon stock today and
is it worth buying well this is my discounted free cash flow evaluation and
I'm not gonna run through exactly how all of this is done I actually did a
whole video if you're interested in learning how to do this I've even got an
Excel template that I built that I can email you if you want but for now I'm
just going to run through the basics of what this is so if you're curious this
link in the description below to the discount of free cash flow video so
first I took my analyst estimates for free cash flow going out the next
years now we can see that they expect a huge dip in 2020 which is logical and
then they have it their free cash flow gradually improving over the coming
years to me this makes sense the huge dip in 2020 the fact that it's
not negative I thought it might be negative according to analysts but I'm
not too surprised because ExxonMobil has gone out of their way to
cut a whole bunch of costs on an annual basis to try to reduce their capital
spending at this point so I'm not surprised that free cash flow be
slightly positive and then of course it's growing from there assuming oil
recovers at least somewhat then we take those estimates and we discounted by a
required rate of return a seven and a half percent that's been my go-to
required rate of return recently then I use the perpetual growth rate of 2.5
percent once again this is my been my go-to number and I believe this is a
very fair number to use in the long run that calculation gives us a fair value
of the company we divide that by the shares outstanding we end up with a fair
value on a per share basis of about $65 per share
now one thing for us to consider is that Exxon is sitting on about 53 billion
dollars in debt and that's probably a bit too high for us to just ignore so
one thing we should do in this situation is adjust this calculation for their net
debt and with that in mind we add this and we end up with a fair value of about
$54 per share and considering that Exxon is currently trading about $44 per share
well the stock looks fairly appealing on a fair value from a DCF standpoint and
if we're curious the difference between these two numbers how we got to the new
company value number well basically we take the old company value we subtract
debt and then we add any cash that they have and that we take that we divide
that by the shares outstanding end up with the fair value of equity equity is
another word for stock so it's this is the adjusted value based on Africana for
their debt so if we paid off their debt this is what the stock would be worth so
our question is should we buy Exxon stock today well personally I think
Exxon Mobil stock looks very interesting based on yesterday's price there's about
a 22% or so upside from the current stock
price and to me that that implies a fairly good margin of safety plus you
gotta love the dividend are that they're paying over the long-run so depending on
each of our individual portfolios I think that Exxon could look quite good
here depending on what the rest of our portfolio like looks like this could be
a great stock to add to it assuming we're willing to sit on it for a long
time because let's face it oil could be down for a while I would expect at least
a few year turnaround or I would plan for at least a few year around before
Exxon's back up and running sort of rocking and rolling again if that
happens then I think Exxon could be a great buy today now I've seen a lot of
comments of people asking about different midstream companies and I know
we mentioned that Exxon's midstream businesses bacon baked into their
downstream numbers but midstream is companies that deal with oil and gas
storage and transportation now many people have asked are those good
investments since there's an oversupply and that stuff has to be stored a lot of
those companies tend to be smaller companies and one of the advantages I
think right now of Exxon is it is a larger company those companies tend to
do better when there's a pullback in the market that's not to say there's not a
place for smaller companies in fact I've done an analysis where I looked at small
companies versus mid companies versus large companies to see how they've
performed and which ones do well in different scenarios went back to before
the Great Recession if you're curious there's a link right
here that's linked in the description below thank you so much for sticking
with me all the way into the video I really appreciate it
thanks and I'll see in the next video