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ExxonMobil's Refining Base Solid, Expensive Drilling a Woe

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We issued an updated research report on energy giant ExxonMobil Corporation (XOM - Free Report) on Aug 7. We believe that the lucrative and extensive refining operations of the integrated energy player will make up for the company’s heavy reliance on expensive offshore drilling activities.

The company currently carries a Zacks Rank #3 (Hold), implying that the stock will perform in line with the broader U.S. equity market over the next one to three months.

ExxonMobil is the world’s best run integrated oil company based on its track record of high return on capital employed. As the largest publicly traded oil firm, the company has long been a core holding for investors seeking defensive as well as continued dividend growth.

In a bid to enhance manufacturing and export capacity, ExxonMobil has decided to invest in refining and chemical manufacturing facilities along the U.S. Gulf Coast. The company started investing in 2013 and anticipates continuing spending through 2022. ExxonMobil is likely to spend as much as $20 billion over the 10-year span.

Also, the company continues to return cash to shareholders on a regular basis. In fact, subsequent to the merger of Exxon and Mobil, the integrated major has returned as much as $370 billion to shareholders.

However, the upstream activities of ExxonMobil are heavily dependent on offshore resources. Drilling in those areas is getting excessively expensive, which might affect the company’s cash flow. The firm might make more profits if it relies on comparatively cheaper onshore operations like domestic shale resources -- where most of the explorers have been gathering over the last few years. Investors should also know that ExxonMobil posted an earnings miss in second-quarter 2017.

On top of that, ExxonMobil has collaborated with Russia for exploring potential commercial reserves in the country. However, tensions between the U.S. and Russia might lead the Republicans to impose sanctions on Russia. Thus, ExxonMobil’s efforts to generate shareholders’ cash flow by exploiting Russian oil and gas reserves might not pay off. 

Moreover, shares of ExxonMobil have underperformed the industry over the last one year. During the aforesaid period, ExxonMobil has lost 9.7%, while the broader industry registered an increase of 4.4%.

Stocks to Consider

Better-ranked players in the energy sector are TransCanada Corporation (TRP - Free Report) , Range Resources Corporation (RRC - Free Report) and Global Partners LP (GLP - Free Report) . All the stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here

TransCanada posted an average positive earnings surprise of 4.06% over the last four quarters.

Range Resources’ 2017 earnings are estimated to grow almost 116%.

Global Partners posted average positive earnings surprise of 415.30% over the prior four quarters.

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