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The shares of international energy giant ExxonMobil (NYSE: XOM) are up around 18% so far in 2019. That's better than any of its major peers. Investors have clearly started to see something in the integrated oil and natural gas company's performance that they like. But, after such a nice run, have you missed out on the opportunity at Exxon? The quick answer is no, but here's the deep dive on why ExxonMobil is still a buy.
It's still cheap
Despite Exxon's big price run so far in 2019, it is still trading near a 30-year low when it comes to price to tangible book value. But the roughly 4% yield, while down from recent levels, is still higher than it's been since the mid-1990s. Investors are clearly reconsidering Exxon today, placing a higher value on its shares. However, the stock remains cheap relative to its history.
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Exxon's price to tangible book value is at the top end of its peer group. Historically, though, it's been afforded a notable premium to the peer group. Part of that comes from the boring consistency of Exxon's business and its tendency to deliver better returns on capital. For example, it has increased its dividend every year for 36 consecutive years -- a feat unmatched by its major peers.
It also has one of the strongest balance sheets in the industry. Long-term debt makes up just 9% of the company's capital structure. That gives Exxon a lot of room to add debt during tough oil markets to fund its capital spending plans and support the dividend. Some of the oil giant's peers prefer to use higher levels of debt offset by higher levels of cash. And while they are, overall, equally as strong financially, that model led many peers to halt dividend increases following the deep oil price decline that started in mid-2014. Exxon's approach is more conservative and, if history is a guide, more robust to the ups and downs of the often volatile oil market.
What's going on today
There are some pretty good reasons to be fond of Exxon in terms of valuation and business approach. But what's changed this year that has led to such an impressive rally? The answer is that Exxon appears to be turning an important corner operationally.
Exxon's stock remains cheap because it was hit hard by falling production levels in recent years and by a drop in its return on capital employed (ROCE) metric, a measure of how well the company uses its shareholders' cash. Both numbers are starting to move higher again.
For example, its ROCE fell sharply along with its peers following the oil price collapse in mid-2014. Historically toward the high end of the peer group, Exxon has dropped to just the middle of the pack. However, it has been investing in new assets that it expects to provide industry-leading returns, and it has been divesting older assets that have lower returns. The company isn't simply looking to move its best projects forward, it's actively looking to have the best projects in the industry. The company's return on capital employed numbers are moving up off the lows, but the goal is to get them up to the mid-teens level. That should move the metric back toward the head of the industry again.