Buy, Sell or Hold: Exxon Mobil Corp. (NYSE: XOM) Again Proves to Be a Profit Gusher

When it released its earnings last week, Exxon Mobil Corp. (NYSE: XOM) proved to the market why it deserves to be the largest company in the world.

The stock promptly sold off following the company's announcement, but that has absolutely nothing to do with fundamentals.

So let me explain why you should put Exxon at the top of your "Buy" list if you don't already own shares. (**)

Profit Gusher

Exxon reported first-quarter earnings of $10.65 billion, or $2.14 per share, up from $6.3 billion, or $1.33 per share, for the same period a year ago. The earnings were the best since 2008, when the company reported profit of $45 billion.

Yet, even though Wall Street was expecting numbers lower than these, speculators still were upset by how the company earned its profit.

You see, the trouble is that the analysts who follow Exxon don't like that the company is not growing its oil production. This is what caused Exxon's share price to pull back after the company reported its results.

But regardless of what these analysts think, Exxon has done a tremendous job transforming its business, and pullbacks like these offer investors a great opportunity to build their position.

Just to sum it all up, Exxon Mobil:

  • Has a growing portfolio of shale properties around the world.
  • Is positioned to quietly develop natural gas fields in Europe.
  • Is using cheap "trapped" U.S. natural gas to produce chemicals here.
  • Spent $5.7 billion buying back shares in the first quarter, with $5 billion more to come next quarter.
  • And has backwards-thinking analysts that give us an edge.

From Oil to Natural Gas

Exxon was founded in 1870 and is based in Irving, TX. The company has 83,000 employees around the world. The market cap is currently $432 billion, making it the world's largest. And it generated $114 billion in revenue in the last quarter.

The stock is up 28% in the last year compared with 14% for the Standard & Poor's 500 Index.

The great thing about Exxon, though, is that it's not resting on its laurels - it's reinventing itself for the 21st century.

While Exxon is still the largest public oil company in the world, that segment of its business model is from the 20th century. The 21st century will be about cleaner burning fuels, such as natural gas.

That's why Exxon has purchased some of the largest natural gas companies in the world, including its 2009 acquisition of XTO Energy Inc., which at the time was the largest U.S. natural gas producer.

This gives Exxon multiple avenues of growth.

For instance, Exxon has taken the lessons learned by small- to medium-sized companies in the United States and started to export its technology to far-flung locations. In the case of Europe, Exxon has quietly leased giant shale fields and begun drilling.

The idea is to bring online these unconventional, long-life natural gas resources in Western nations that are reliant on Russia for natural gas supplies in the winter. This shale revolution has Exxon in a land grab for shale assets.

Furthermore, the growing supply of natural gas in the United States, which is trapped until export facilities for liquefied natural gas are built, allows Exxon to consume cheap feedstock in its chemical business and then export the value-added products around the world.

You see, natural gas is one of the primary inputs into chemicals. It is used to fire boilers and as a feedstock for producing plastics. Simply put, natural gas is the unrefined product that helps to make your chemicals.

That's why, to me, the most important thing about Exxon's business is that it's been able to increase its natural gas production and generate higher chemical profits. I consider these dual sides of the same segment of the company.

Exxon stock hit a new 52-week high of $88.23 a share leading up to its earnings release last Wednesday. It closed Friday at $87.98 a share.

Investors also should note that Exxon spent $5.7 billion on stock buybacks the first three months of the year, with another $5 billion in buybacks expected in the second quarter. This puts the company on pace to spend $20 billion in share buybacks in 2011 alone.

Action to Take: "Buy" Exxon Mobil Corp. (NYSE: XOM) (**).

Exxon Mobil just had one of its best ever quarters as it continues to grow its diverse business. The company is one of the best-capitalized companies in the world, with great risk management.

In an economy with signs of stagflation, Exxon is positioned to profitably survive and grow its asset mix for a future that is not as reliant on the past as most other oil companies are.

So let's buy XOM at market.

(**) Special Note of Disclosure: Jack Barnes has no interest in Exxon Mobil. (NYSE: XOM).

About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department - just as the Asian contagion infected the Asian tiger countries.

Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.

Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed AMR Corp (NYSE: AMR)

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