hi i'm jimmy in this video we're looking at exxon mobil ticker symbol xom we're going to look
quickly at exxon mobil's business and then we're going to see if we can come up with a fair value
for exxon mobil stock using a discounted free cash flow valuation okay so before we jump in
uh just recently i actually did a video where i went through how overvalued the stock market is
right now we use different methods like uh the p ratio the shield or pe ratio the buffett indicator
things along those lines within that video we broke down each of the 11 sectors by their p e
ratio and energy turned out to be one of the ones that could be undervalued that was the reason i
actually chose this stock because i figured this one exxonmobil and chevron were the two most
logical places to start because i'm really looking for another addition to my personal portfolio
so if you're curious i'll leave a link to that video in the description below but basically
that's how we got to this video okay so let's jump right in so exxon breaks their business
into three primary segments they have downstream chemicals and then upstream the upstream part
of their business is where they drill for things like oil and gas downstream is where they sell it
in either gas stations or they'll produce it in refineries they refine it in refineries
and then the chemicals part of their business is where they produce things like polypropylene
polyethylene those are things around plastics so as we could see the downstream part of their
business dominates the revenue at least it did in 2019 and in their 2019 annual report they
also publish where in the world they produce this revenue so we can break these down one more time
and in that now we can see that each segment is actually dominated by non-us revenue so once again
this this is a very global company so focusing on the downstream part of their business for a
moment well downstream is generally broken into two categories refining and marketing refining
is where they take crude oil converted over to gasoline things along those lines and then the uh
the marketing is places like gas stations that's where they actually sell the final product
and one obvious question might be with the rise of electric vehicles well isn't exxon likely to
see a huge decline in the consumption of their gasoline and personally i think that yes in the
long run that's going to happen but i think that's going to take a very long time for us to get there
in fact this is a chart of the consumption of crude oil and liquid fuels and this was leading
up to 2020. so pre-covered pre-covered this is how consumption was going and as we could see
well this trend was trending higher despite the increasingly the bigger and bigger impact of
electric vehicles companies like tesla then when covet hit well we can see that consumption tanked
people stopped driving businesses began to shut down manufacturing slowed so there was a global
shutdown of consumption or a global decrease of consumption as we can see the numbers still
quite large so this there was a global decrease in consumption but then since the bottom well as
different economies have come back online consumption has gradually begin to increase again
so i'm expecting as the economies begin to ramp up further throughout the world as
more economies come more fully online i would expect for consumption to continue to ramp up
so that's a good thing now another product that uh that many energy companies focus on
exxon mobil included is natural gas and as we can see well this is put out by the department
of energy and this is the natural gas consumption as we can see the overall trend is in fact higher
and it's likely to continue to climb now natural gas is often used to for the heating of homes
it's used to generate electricity uh there's many industrial uses they have some commercial uses
there's even some use in transportation and as we may imagine these spikes that we see here well
those spikes are weather related of course the ability the need to heat homes with natural gas
or heat even heat businesses in natural gas are going to be much higher in the winter hence you
see overall consumption uh in winter being much higher but again the overall trend is moving
up now the reason that i bring this up is that every now and again i'll see different comments
on different videos and they talk about energy companies being dead any companies that are tied
to oil or natural gas are dead and usually it's presented in the context of a company like tesla
and while i agree that yes the future of vehicles is going to be a company like tesla or a group of
companies like tesla electric vehicles is where the world is going right now there's over 1.2
billion gasoline vehicles on the planet and there's only a handful you know a handful of
millions of electric vehicles in use right now so compared to 1.2 billion they get a long way to go
now i'm not saying that things are all good for a company like exxon in fact this is their revenue
chart going back the past few years and as we could see revenue has been gradually falling
now obviously consumption is not the only factor to consider here otherwise these numbers would
be moving higher here's the price of crude oil as example obviously the price of crude oil if
a company if exxon could sell oil at a hundred dollars a barrel when it was back up here and
then a year later they're only to sell they're only able to sell that same barrel of oil for 50
or 60 or 70 a barrel obviously revenue revenue is going to decline assuming they even kept the
same amount of production going so clearly crude oil prices are going to have an impact
on overall revenue in fact if we were to overlay crude oil on top of the revenue chart well we can
see that when crude oil began to decline well that was about the same time that the revenue
significantly began to decline now if we were to switch out crude oil and replace that with natural
gas well we can see that once again especially in the early years as natural gas prices began to run
up well revenue for exxon mobil also began to run off and to consider another factor well on top of
oil and gas or something known as the crack spray this is a chart of the three two one crack spread
now this is just one example of a crack spread there are many different types of examples
many different ways to use the crack spread many different crack spreads out there but
this is one example of them and basically what the crack spread does is it tries to estimate
the profit per barrel of oil and this is mostly focusing on the downstream business so usually
it's in refineries it's important to refineries so the downstream business which is one of the
main parts of their business so this is very important to what exxon does just to illustrate
what the crack spread how the crack spread is used so in this example you have three barrels of oil
refined into two barrels of gasoline and one barrel of distillate fuel so what would the profit
margin be assuming that was the ratio that came out now every quarter every year every company is
going to have slightly different ratios that's why you look at something like the cross crack
spread and it's not dollar for dollar exactly what they get it will be some variation of that
but it is a good way to roughly estimate how the downstream business is doing from a profitability
standpoint now when we overlay the crack spot on top of revenue well we can see that broadly
speaking when the crack spread was at its highest well revenue was also at its highest so we can see
that there are many factors that contribute to revenue growth profitability and how far
and how fast a company can ultimately grow with the crack spread if oil prices stayed the same
and gasoline prices shot up well you would see an increase in the crack spread and hence the company
would become more profitable that is why it's very important to track to understand each business
each line of business and to be able to track what is the under the fundamental drivers behind that
business with all that being said what do we think exxon mobil stock is worth today well to
come up with that i actually did a calculation of discounted free cash flow using analyst estimates
for exxon mobil stock and if you're curious how we did this whole calculation well i actually
did a video where i went where i walked through step by step how to do this type of calculation
i created an excel template you're welcome to have it that's this is actually from the excel template
so if you're curious i'll leave a link to that video in the description below but basically what
we did is we took analyst estimates up here and one interesting point that i think is important is
it may not be a surprise but 2020 is expected to be a negative year for exxon mobil from a free
cash flow perspective and x 2020 is almost over for x on they actually completed three quarters
already so it's really just the final quarter that remains so yes it is an estimate because they are
including that in there but just so we're on the same page they've only got the fourth quarter left
to report so basically what we do is we take our analyst estimates we discount that by our required
rate of return for us we're using seven and a half percent we grow that out with a perpetual
growth rate of two and a half percent and that gives us a fair value for exxon mobil stock of
about seventy dollars per share but we're going to want to we're going to want to account for
exxon's debt in this whole thing because they get about 69 billion dollars in debt well when we add
the impact of net debt net debt is debt minus cash that they have on hand well that gives
us a fair value the new adjusted fair value for exxon mobil stock is about 58 dollars per share
now on a recent analyst call that i listened to well exxon mobil came out the management of exxon
mobil came out and said they want to keep debt below 70 billion which is good because they're
mighty close to that right now on that same call they said that they also want to decrease
their capital expenditures and that's a good thing because if they decrease capital expenditures that
will increase their free cash flow that's likely already accounted for in their free cash flow
estimates since these are updated numbers from analysts so they would have accounted for that but
either way another point that analysts that the management of exxon mobil brought out on that call
is that they they believe that they will continue to be able to pay out their dividend and that's
a very good thing because their dividend has been consistently increased for many years exxon mobil
is one of those companies that many people rely on their dividends so them maintaining their dividend
is important to them certainly from a perception perspective perception perspective yeah so hearing
management say that it's important to them that they continue to pay out their dividend we can
only assume that their dividend is relatively safe at least in the near future now if we were
to try to calculate what their dividend yield is well we take the past 12 months of dividends
we divide that by the current uh the current share of exxon mobil stock which is about 43
per share as of the shooting of this video we divide that we get a dividend yield of about 8
now this is very important if we want to invest in their stock today
because right now that that dividend we locked that in if we were to buy it today
this is known as yield on cost so that's key for us to keep in mind now our question is should we
buy it today and for me this is actually a very tempting stock my only hesitation right now is i
actually like the price i like the margin of safety but i'm a bit hesitant because
what's better exxon mobil or chevron just as an example if you go if you guys have done
any research on any of the other companies in the business please let me know in the comments below
but that's my only hesitation we're jumping in and putting my own personal money in this right now
is that i want to hurry up and analyze some of the other stocks in the industry that way i can get a
better understanding of which companies the best because if i have a choice between two companies
ideally i want to research both i don't want to just blindly go into one and not look at the other
and for dividend investors out there well right now like i said exxon has a dividend yield of
about eight percent the next logical company to analyze in my mind is chevron they have a
dividend yield of about six percent so if dividend yield is very important perhaps that's enough of a
differentiator for us to consider going with exxon but for me i would love to be able to lock in the
eight percent dividend yield but have a reasonable amount of confidence that the stock will also move
higher to me that's sort of a double win now i know i mentioned dividend yield on cost before
and if you're not too familiar with what that is dividend yield on cost is a very important
consideration for dividend investors to watch it's something that it's key for us to understand so
if you'd like to learn more more i actually did a video on that topic where i go through what it is
and how dividend investors can use it if you're curious i got a link right here to that video i
got a link in the description below and thank you so much for sticking with me all the way
to the end of the video i really appreciate it thank you and i'll see in the next video