Is Bigger Better with Oil Stocks?

It’s no secret that Exxon Mobil (NYSE: XOM) is the world’s largest public oil and gas company.big-oil
It’s heavily diversified geographically and operationally. In terms of operations, it explores and produces oil and natural gas, but also has its hand in the refining and marketing business.
The refining industry has been holding up quite nicely, thanks to the steady demand for gasoline. Exxon is also the world’s largest producer of various chemicals like olefins, which are used in the production of plastics.
The beauty of these various businesses is that they allow for a steady flow of revenues. And in terms of geographical diversity, Exxon generates over 80% of its earnings from outside the U.S. This includes having a presence in some of the fastest growing areas in the oil market, including West Africa, Russia and Australia. In the longer term, Exxon has opportunities in other unconventional areas like the Arctic and Black Sea.
Shares of Exxon are down just 20% from July of last year. Smaller oil stocks haven’t held up quite as well. For example, Chesapeake Energy (NYSE: CHK) and Apache Corporation (NYSE: APA) are down 53% and 43%, respectively, from their 2014 highs.
Exxon’s ability to weather the oil selloff comes from its size, but also because it’s relatively “safe,” with the highest credit rating available, AAA. With its solid balance sheet, Exxon also has the opportunity to take advantage of the steep fall in oil prices by being able to buy prime oil assets and acreage relatively cheap.
Earlier this month, Exxon was rumored to be interested in purchasing the oil and gas company Whiting Petroleum (NYSE: WLL). Whiting, which has a $6 billion market cap, bought up Kodiak Oil & Gas last year, making it one of the largest acreage owners in the Bakken shale.
It’s worth noting that Exxon already has a presence in the Bakken, owning some 500,000 acres thanks to its XTO Energy acquisition over half a decade ago. In any case, shares of Whiting traded upwards of $40 a share, but tumbled 25% when it appeared that a deal wouldn’t get done.
You don’t have to worry about that type of volatility with Exxon. And when you’re the biggest player in the space, and have a AAA rating, you can be selective when it comes to making acquisitions.
At the same time, I also think Exxon’s top priority is maintaining the integrity of its dividend.
Exxon has a record of 32 consecutive years of annual dividend increases. It’s paying an annual dividend of $2.76 per share, putting its dividend yield up to 3.3% – the highest yield it has offered in more than 15 years. Right now, it’s paying out 74% of its earnings via dividends.
Earnings are expected to grow over 40% next year. On a pro forma basis, Exxon’s current dividend is just a 50% payout of next year’s earnings. And as I mentioned, it still has one of the best balance sheets in the business, with a debt-to-equity ratio of around 16%. For a little context, Chesapeake has a debt-to-equity ratio of 83% and Apache’s is 43%.
Sometimes, it pays to be the biggest. Exxon has been the best performing of the “supermajors” – a group of the largest oil and gas companies that includes BP (NYSE: BP), Chevron (NYSE: CVX), Royal Dutch Shell (NYSE: RDS-A) and Total SA (NYSE: TOT) – over the last 25 years. Shares of Exxon are up 460% over that period, while the next best supermajor is Chevron, which is up 364%.
In the end, if you’re looking for a way to play oil, it pays to stick to the very large and diversified names.
It doesn’t get much larger or more diversified than Exxon. It also doesn’t hurt that it offers a 3.3% dividend yield.

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