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Thursday, February 21, 2008

Stock #3 -- Exxon Mobil


Macro Picture

This is the year that the world starts using crude oil at a rate of more than 1,000 barrels per second. The International Energy Agency Feb. 13 forecast global oil use may gain by 1.7 million barrels a day in 2008 to 87.6 million bpd. What’s more, IEA, the adviser to 27 oil-consuming nations, predicts that Chinese and Indian oil imports will almost quadruple by 2030, creating a supply crunch as soon as 2015.

It may come sooner than that. Consider …

  • Surplus world oil capacity has been declining since 2001. Current surplus capacity is one million barrels a day — down from more than five million barrels a day.
  • Output from the world's existing oil fields is declining at a rate of about 5% per year. New production is coming online, but not fast enough to keep up with growing demand. Exploration can't keep up with production, either.
  • The U.K.-based Oil Depletion Analysis Centre recently reported that 60 of the world's 98 oil producing countries have already hit peak oil production.

The oil that is found is more expensive. In fact, onshore drilling costs in the U.S. have jumped nearly 20% in recent years. Offshore drilling costs have jumped nearly 38%, to $70 per barrel.

All in all, it’s a great time for oil producers.

Company Fundamentals

Earnings Bonanza. Exxon recently reported the highest ever quarterly and yearly earnings for a US company. Fourth-quarter net income rose nearly 14 percent to $11.66 billion, or $2.13 a share, from $10.25 billion, or $1.76 a share, in 2006.

The company's full-year earnings of $40.61 billion set a new record for U.S. profits -- beating out its own previous mark for 2006.

Reserves are growing … or are they? Exxon says it replaced 101% of its production in 2007. The US government disputes this, saying Exxon replaced just three out of every 4 barrels it produced.

Exxon’s worldwide proved oil and gas reserves totaled 1.6 billion oil-equivalent barrels. Exxon’s 10-year average replacement ratio is 112%, and it has found more oil than it has pumped for 14 consecutive years.

Production and other problems: Quarterly production rose just 1 percent. Exxon also lost oil from assets that were taken over by Venezuela. What’s more, despite its record earnings, Exxon reports that ikts downstream earnings were off sharply from a year ago -- $622 million in the most-recent quarter versus $945 million in 2006.

Refining margins -- the difference between the cost of crude and what the company makes on refined products such as gasoline -- have been squeezed in recent months as spiking oil prices outpaced increases in gasoline prices and other refined products.

Exxon is the big enchilada of oil, and my price target is $103, a nice move from its current level of $88.10. However, I find more value in other companies – for example, any of my picks in my recent oil report, Running on Fumes.

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