Exxon Mobil Bucks The Trend

At its annual analyst day in New York Thursday, Exxon Mobil Corp. (XOM) offered a business-as-usual outlook for 2009 and beyond, in line with its status as the conservative benchmark in the oil patch. Management stated that the company’s operating and strategic plans remain unaffected by the credit market squeeze and sharp commodity-price drop.

But that’s no surprise - after all, this is Exxon we are talking about. The company is as good a credit as Uncle Sam, with a AAA rating and more cash than debt on its balance sheet. As of the end of 2008, it had $32 billion in cash and around $7 billion in debt.

Growth in oil and natural gas production has been a lingering concern in the Exxon story, which is understandable given its considerable production base. It takes quite a few new barrels to move the needle on Exxon’s production base in the 4 million oil-equivalent barrels a day neighborhood. The company provided more explicit guidance on the production front, with annual growth in the 2%-3% range over the coming years.

Exxon plans to maintain its capital spending program within its stated annual range of $25 billion to $30 billion (this year’s budget of $29 billion exceeds the 2008 level by 11%) and continue returning excess cash to shareholders through a growing dividend and share buybacks.

In the current environment of dividend insecurity when companies are scrambling to cut their dividend payouts to conserve capital, Exxon’s dividend is not only secure but expected to grow. Exxon has increased its dividend in each of the last 26 years, with an annual growth rate of about 5%. At current levels, Exxon’s dividend works out to a 2.6% yield, which given its security and ‘growthiness’ is fairly attractive.

On the share buybacks front, we do not think the company can maintain its recent quarterly run rate of around $8 billion due to the weak commodity-price environment. But then the inherent flexibility of the buyback route is its key attribute.

Exxon remains the pre-eminent defensive name in the oil patch, if not the entire market. We have all along been fans of this quality operator, whose capital discipline, returns focus, and operational excellence remain matchless.

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