In the last article I wrote here, I speculated that Buffett might be currently purchasing shares of ExxonMobil when I noted that the current price of the stock is only 3-4% higher than where it was when Buffett purchased 0.9% of the entire company last year. I connected the bridge when I said that surely the actual internal value of what the company should be worth has at least increased by 3-4% over that time.
A thoughtful reader challenged that assertion, effectively saying—hey, we don’t have clear evidence that Exxon is actually doing better this year compared to last. He noted that Exxon made $2.10 in the first quarter of this year, and made $2.12 in the first quarter of last year. Then he noted that the $2.05 per share that Exxon reported in profits during the second quarter had been artificially boosted because Exxon sold some assets in countries that define due process as “pay us kickbacks or we’ll nationalize your assets”, so the real figure should be somewhat lower. Last year, Exxon made $1.55 in the second quarter.
My response: Allright, so if you want to do year-over-year comparisons that remove one-time items, it would look something like this:
2013 Exxon: $2.12 in the first quarter + $1.55 in the second quarter = $3.67 in first-half 2013 earnings.
2014 Exxon: $2.10 in the first quarter + $2.05 in the second quarter – $0.25 in asset sales = $3.90 in first-half 2014 earnings.
When you compare Exxon’s half-year comparison between 2013 and 2014, even adjusting for asset sales, you will see that profits are up 6.26%. Considering we are in a normal operating environment for the energy sector, I felt confident noting that Exxon has probably increased around 3-4% in value since Warren Buffett originally started purchasing the stock.
That said, I don’t think year-to-year comparisons are the best way to judge Exxon stock. Energy profits fluctuate wildly, and we shouldn’t apply the standards we expect from non-cyclical companies to those that are in the industrial or energy sectors because the price of basic commodities are always in flux. Coca-Cola doesn’t have to worry about lowering its prices of soda 20% next year, so year-to-year comparisons pack some meaning. With energy companies, you have to judge over 5-10 year periods. You have to adjust for those fluctuations by looking at growing production, growing reserves, and in Exxon’s case, the effects of an ongoing stock buyback program.
I mean, imagine the yo-yo treatment you would give yourself if you tried to analyze Exxon’s profits on a year-to-year basis: Exxon’s net profits grew from $25 billion in 2004 to $45 billion in 2008, before dropping to $19 billion in 2009, rebounding to $30 billion in 2010, and then expected to be around $34 billion in 2014. You have to keep your eye on the growth from $25 billion in 2004 to $34 billion in 2014, and not get caught up in the annual fluctuations that happen in between, especially considering that even in the worst of 2009, Exxon’s dividend payment still only amounted to 43% of profits.
The other thing is the immense buyback: In 2004, Exxon had 6.4 billion shares outstanding. Now, the company is only divided into 4.2 billion pieces. Boy, does that matter—Exxon the business grew 36% in total over the past ten years, but each share that you owned grew its profits from $3.89 to $8.00 over that ten-year time frame. That’s 105% growth in profits over the past ten years when you take into account the stock buyback in addition to the growth of the business—and I didn’t even touch on the dividends.
Even if Exxon’s profits did go down a little bit, its actual value as an enterprise could have grown. How would this have been possible? For one, the profit declines were mostly the result of lower oil, oil refining, and chemical prices, and a slight downtick in production as a result of modest asset sales. The company is growing its reserves at a 1.2x existing production rate each year (so that it has accumulated more oil to drill in the past twelve months than it has actually drilled), the company is split into 3% fewer pieces so that when profits do climb again you’ll have a higher claim, and there are projects expected to grow production at a 3-4% rate that are coming live during the 2015-2017 stretch.
But enough of this—it feels dirty talking about Exxon on such a short-term basis. I mean, this is a stock that would have compounded a $100,000 invested in 1984 into $5.5 million today, even if you spent every dividend check—all 120 of them which grew each year—along the way.