ExxonMobil Corporation (NYSE: XOM) is not feeling the love these days. Investors have pushed its stock lower by around 8% over the past year compared to price increases at the oil major's peers. There are solid reasons for the disparate stock performance, but don't get too caught up in the short-term issues currently hampering ExxonMobil's shares. In fact, the worst mistake ExxonMobil investors can make right now is to forget that what makes this company great can also make it look bad over short periods of time. Here's why you should be sticking around.
A rock in a storm
When oil started plunging in mid-2014, investors were concerned that oil majors like Exxon, Chevron, Royal Dutch Shell, BP, Total S.A., and ENI S.p.A. wouldn't be able to fund their dividends and growth spending plans at the same time. That concern proved valid, as some chose to hold dividends steady during the downturn while others were forced to cut their payout. Exxon, however, increased its dividend each year, bringing its annual streak of increases up to an incredible 35 years.
One of the big problems that the oil giants had to deal with was leverage. During the downturn, the group was increasingly reliant on debt to support their businesses. That's not a long-term solution, and luckily oil prices have recovered to the point where most players in the oil patch are now paying down debt. However, even though Exxon added more than $20 billion worth of debt between 2014 and 2016, long-term liabilities made up only 15% of its capital structure at the end of 2016. That's a modest level of debt for any company and it marked the recent peak, leverage declined in 2017.
And while other oil majors worried investors with losses driven by large asset write downs during the downturn, Exxon managed to turn a profit each year. A big part of that consistency is a function of a conservative culture and a history of achieving peer-beating returns on capital employed.
Waxing and waning
Right now, however, investors fear that Exxon isn't hitting on all cylinders and has been left to play catch-up. Performance concerns are related to the fact that its peers have caught up to Exxon with regard to return on capital employed. Investor concerns that the company is trying to catch up to peers, meanwhile, were heightened at the company's 2018 analyst day when management announced large capital spending plans over the next couple of years. Annual capital spending is expected to reach nearly $30 billion by 2019, up from $23 billion in 2017.
All in all, investors aren't making an unreasonable assessment of Exxon's position today. But they are, perhaps, making a shortsighted one. For example, the company's peers have caught up to Exxon and even surpassed it with regard to return on capital employed (ROCE), but they haven't left Exxon behind. Exxon is still a well-run company and it's aiming to push its performance higher over the next few years, with a goal of hitting a 10% ROCE by 2020 (up from 7% in 2017), and even higher thereafter.
There are two main goals to that big capital spending push. First, Exxon wants to increase upstream production, something the oil giant failed to do in 2017. It's spending to expand its onshore U.S. business and on key projects in Guyana, Brazil, and Mozambique. These are large projects that should bolster not only Exxon's production for years into the future but also its reserves. Exxon is also looking to expand its downstream operations, including investments in both the refining and chemicals businesses. These are areas that help balance out performance over time.
Exxon is a conservative, slow-moving giant known for reliable dividend increases, low leverage, and solid execution. That hasn't changed, and it's in fact the core reason to own the company. Its approach is arguably what allowed Exxon to withstand the downturn better than most peers, but it's also what is leaving it a little flat-footed as the industry starts to recover. Given enough time, Exxon should be able to fix that, having already laid out its plans for improving the business's performance.
Don't get caught up in the now
Investors often look at short-term results and react without fully considering the long-term implications of a company's decisions. Dumping Exxon today would be just such a rash mistake. There's no question that this oil giant appears to be lagging the pack right now. But that's partly a result of the conservative, long-term approach that led to outperformance during the downturn. With the stock lagging its peers, now is a good time to remember what makes Exxon special -- not to jump ship.
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