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We reaffirmed our Neutral recommendation on ExxonMobil Corporation (XOM - Analyst Report) on Dec 12, 2013. We expect the commencement of key projects and other expansion activities in 2014 to bear fruit. However, the company’s growth and returns picture is somewhat marred by a high level of stockpiles that affect margins.
Why Maintained?
ExxonMobil is the world’s best run integrated oil company given its track record of superior return on capital employed. As the largest publicly traded oil company, ExxonMobil has long been a core holding for investors seeking a defensive name with continued dividend growth.
ExxonMobil is fairly active in its investment program. The company plans to spend about $185 billion over the next five years — up 29% from the last five-year period. The capex covers as many as 21 important oil and gas projects currently on the anvil and is estimated to generate over 1 million net oil-equivalent barrels per day by 2016.
The key projects include the Kearl Oil Sands development project in Canada, four in West Africa and Kashagan Phase 1 in Kazakhstan. Exxon is also engaged in a large liquefied natural gas project in Papua New Guinea. It will further unearth more oil from the development of Hebron oil field, off the shore of Canadian province Newfoundland and Labrador.
Exploration activities include unconventional natural gas across North America as well as offshore regions, including the Gulf of Mexico. Notably, Exxon achieved success in the exploration of a well offshore Tanzania, where it came across a massive amount of recoverable gas of high quality.
ExxonMobil is in excellent financial health and has an AAA credit profile. With strong cash generation ability, the company is consistently returning value to it shareholders.
We, however, remain skeptical due to the company’s sharp drop in refinery utilization rates during the third quarter. Owing to lower crack spreads and narrowed crude oil differentials, fortunes of refiners industry wide went southward. In the third quarter, ExxonMobil's refinery throughput averaged 4.8 million barrels per day (MMBPD), down 1.7% from the year-earlier level of 4.9 MMBPD. As a result, the segment recorded profit of $592 million against $2.6 billion in the year-ago quarter.

Stocks That Warrant a Look

While we expect ExxonMobil to perform in line with its peers and industry levels in the coming months and advise investors to wait for a better entry point before accumulating shares, one can look at Zacks Ranked #1 (Strong Buy) stocks – Blueknight Energy Partners, L.P. (BKEP - Snapshot Report), Harvest Natural Resources Inc. (HNR - Snapshot Report) and Pacific Drilling S.A. (PACD - Snapshot Report), as good buying opportunities for the short term.

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