tag:blogger.com,1999:blog-5389144729834496735.post2709934264296610907..comments2024-03-17T05:15:55.634-04:00Comments on The Brooklyn Investor: Exxon Mobil (XOM)Unknownnoreply@blogger.comBlogger24125tag:blogger.com,1999:blog-5389144729834496735.post-19031995749855691522015-10-22T08:36:19.485-04:002015-10-22T08:36:19.485-04:00Yes, you're right. I didn't put the debt ...Yes, you're right. I didn't put the debt cost in because it's pretty small, at least for now - the interest costs something like $2.1 billion after tax based on last quarter's numbers, but that's almost certainly going up a bit. That comes out to somewhere around a .5% deduction to the value at 2x, but if they decided to pay the debt back down the road and keep net debt / capital around 0 then the cost would be higher, and perhaps significantly.<br /><br />Anyways, thanks for the response, and I was wondering if there was any way I could send you a private message?<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-81723299664353502982015-10-22T07:21:25.745-04:002015-10-22T07:21:25.745-04:00Hi,
I don't have any particular thoughts on X...Hi, <br />I don't have any particular thoughts on XOM other than that it will probably do very well over time. I agree with your writeup; over time XOM will be fine. They have lived in $5/barrel and $150/barrel oil markets. As you say, the costs take time to work through the system. Drilling/finding costs went through the roof over the past few years due to the high price of oil and the oil price tanked. The oil price (to the extent not hedged) will hit the revenue line right away but the costs will take time to work their way down. <br /><br />To the extent that costs are up permanently (harder to low cost oil having to drill deeper etc.), as you say, the cost of production will go up increasing the floor price of oil. <br /><br />So over time, oil companies should earn decent returns. It's just that when prices move so fast, companies can look better than they are (when crude hit $150) and worse (like now) because of that lead-lag. <br /><br />The only issue I might have is that you calculate capital employed per share. Capital employed includes debt, so if you want to get back to a per share equity value, you should calculate the fair value of the total capital, and then deduct the debt and divide that by number of shares. Either that, or you have to deduct interest expense from the return part of the ROCE. <br /><br />Otherwise, I agree with the gist of your post.kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-76410178148484491122015-10-21T07:16:21.734-04:002015-10-21T07:16:21.734-04:00Any current thoughts on Exxon? I would be interes...Any current thoughts on Exxon? I would be interested in how you thought about actually valuing it, as you usually don’t see actually valuations of oil companies.<br /><br />I wrote this article on seeking alpha a while back (sorry I couldn't figure out how to hyperlink)<br /><br />http://seekingalpha.com/article/3031526-exxon-mobil-return-on-capital-employed-roce-and-valuation<br /><br />It was meant for people with a little less background in finance, but it’s pretty simple:<br /><br />1. The long-term price of oil needs to be high enough to support needed capex, which would entail an industry ROIC perhaps ~10%.<br />2. Due to a good corporate culture, smart capital allocation, and technical excellence, ROIC should continue to be at least 5% or so higher than industry ROIC.<br />3. Assuming ~5% growth in invested capital, a 15% ROIC would get you to 5% earnings growth and fcf = 10% of invested capital. A 10% return hurdle would get to a valuation of 2x invested capital.<br /><br />The article went into a lot more depth, but those are the spark notes. Again, I would be interested to hear your thoughts on how you might take a stab at valuation. <br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-61766770768648402652013-11-24T07:17:17.239-05:002013-11-24T07:17:17.239-05:00Hi,
Yes, I know Buffett read the book; that'...Hi, <br /><br />Yes, I know Buffett read the book; that's why I read it. I meant that I thought it unlikely that that was the reason he bought XOM stock; that Thorndike said it acts like an outsider CEO company. I'm sure Buffett was aware of that long before reading the book. That's what I meant. <br /><br />Thanks for reading!kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-27796162898830609152013-11-24T02:22:56.340-05:002013-11-24T02:22:56.340-05:00You asked yourself if Buffett read "The Outsi...You asked yourself if Buffett read "The Outsiders", and said it is highly unlikely. Well, I guess he did read the book since he recommended "The Outsiders" on Berkshire's 2012 annual letter.<br /><br />Great minds think alike :-)<br /><br />Excerpt from the letter, p.22:<br />The Outsiders, by William Thorndike, Jr., is an outstanding book about CEOs who excelled at capital<br />allocation. It has an insightful chapter on our director, Tom Murphy, overall the best business manager I’ve ever<br />met. I also recommend The Clash of the Cultures by Jack Bogle and Laura Rittenhouse’s Investing Between the<br />Lines. Should you need to ship your book purchases, a shipping service will be available nearbyAssaf Nathanhttp://assafnathan.comnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-44878405997640461062013-11-22T10:09:10.132-05:002013-11-22T10:09:10.132-05:00Hi,
I haven't looked at Crown recently. Ma...Hi, <br /><br />I haven't looked at Crown recently. Maybe I should take a look. Thanks for the tip. kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-83561630586108299922013-11-22T00:17:02.397-05:002013-11-22T00:17:02.397-05:00KK,
Thank you again for sharing so many great ide...KK,<br /><br />Thank you again for sharing so many great ideas and concepts. <br /><br />Have you look at Crown Holding? Good free cash flow (estimated FCF of 500m for 2013 and total market cap of around 6b); one of three major players in the industry (the other competitor BLL is interesting too); good allocation of FCF (buy backs, acquisitions and production expansion in emerging markets); and Lou Simpson holds a position. Tonynoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-41871697157375214252013-11-21T11:22:41.940-05:002013-11-21T11:22:41.940-05:00Yes, he has a good point. I wouldn't worry to...Yes, he has a good point. I wouldn't worry too much about what is happening in the short term. You are betting on XOM management over time, not over nine months or two years.<br /><br />It is true that we are taking out a lot of the cheap resources and future resources will come at a higher cost. But the situation is dynamic, not static. If we do deplete cheap oil, then prices will have to go up, right? So we can't just say, hey, crude development and production cost is going up but crude prices are down, uh oh... Over time, crude prices must go up. If the peak oil disbelievers are right, then there is plenty more low cost crude to get out. <br /><br />The question would then be who is best situated to take advantage of either scenario? <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-1082880092416442542013-11-21T11:18:55.820-05:002013-11-21T11:18:55.820-05:00Well, you never know. I don't have a strong o...Well, you never know. I don't have a strong opinion either way. But I do agree share repurchases is better as long as they can do it under intrinsic value.kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-51487560659727491672013-11-21T02:36:49.706-05:002013-11-21T02:36:49.706-05:00Sorry to disagree but I think the day Buffet start...Sorry to disagree but I think the day Buffet starts paying a dividend is the day when hell freezes over. It is just less efficient than buying back his own stock (he could buy back at a significantly higher price/book ratio and still be more efficient if you factor in the tax effect).<br />Eddienoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-10316345478779217392013-11-20T21:46:13.184-05:002013-11-20T21:46:13.184-05:00Chanos disagrees: http://www.reuters.com/article/2...Chanos disagrees: http://www.reuters.com/article/2013/11/19/us-investment-summit-chanos-idUSBRE9AI0QC20131119Anonymoushttps://www.blogger.com/profile/02411564658955886450noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-17085570050664888992013-11-20T11:20:33.479-05:002013-11-20T11:20:33.479-05:00It's an interesting question of what BRK would...It's an interesting question of what BRK would be like today if they bought back stock over time, like say, Loews. Their equity base would be much smaller so Buffett's stockpicking skills would be of more value (bigger universe to choose from). <br /><br />But then BRK never really has been that cheap until recently. Maybe it was cheap back in 1999/2000 but that was only briefly. As for buying back stock in 2009 or whenever, well, he could've bought BAC even cheaper. Or many other things that were cheap at the time. <br /><br />So at any given point in time, other stocks were available too, not just BRK. <br /><br />The other big factor that people forget about is liquidity. If BRK wanted to buy back $3 billion in BRK stock, I think that would be a lot harder than trying to buy $3 billion in IBM or XOM, for example. So that's the other issue. You know Buffett is picky about price and doesn't want to keep lifting offers to fill an order (that's how he missed WMT years ago, I think...) <br /><br />So that's the other major factor. <br /><br />Otherwise, Buffett has been doing fine. I think eventually they will buy back stock and pay dividends. We may be very close to that point, but who knows... I don't obsess over that sort of thing at all. It doesn't matter to me that much. kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-54103046136996758722013-11-20T11:14:09.220-05:002013-11-20T11:14:09.220-05:00prob because he doesnt want to constantly be discu...prob because he doesnt want to constantly be discussing what IV is and so onAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-57260630864115806582013-11-20T08:59:51.292-05:002013-11-20T08:59:51.292-05:00kk, thanks, buffett and munger have benefitted us ...kk, thanks, buffett and munger have benefitted us partners by working free for 30 years and not taking billions of our equity year after year forever. However, the question remains, why did it take so long for brk to authorize a buyback and once they did, why did buffett use the 110 % of book limit which he knew would be exceeded shortly after the press release was released ? Why not just authorize buybacks at, material discounts to IV, if he rally has any interest in buying back brk ? hclasvegashttp://brooklyninvestor.blogspot.ca/2013/11/exxon-mobil-xom.html#comment-formnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-31824073794750469962013-11-20T08:33:10.750-05:002013-11-20T08:33:10.750-05:00In Buffett's case, he has done well. I meant ...In Buffett's case, he has done well. I meant that conventional management would expand the empire without regard for shareholder value. In fact, they would do it at the expense of shareholder value. Buffett clearly has benefitted his shareholders with most of his purchases. <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-29884061334340439172013-11-20T07:54:56.665-05:002013-11-20T07:54:56.665-05:00Conventional management would think more about exp...Conventional management would think more about expanding the empire, increasing reserves or production. XOM focuses on shareholder value. """<br /><br />I often wonder, is buffett , empire building, or focusing on shareholder value, based on his reluctance to authorize a buyback until sept 2011 , with a gun to his head ? <br /><br />hclasvegashttp://brooklyninvestor.blogspot.com/2013/11/exxon-mobil-xom.html?showComment=1384951844002#c1098804403791326834noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-10988044037913268342013-11-20T07:50:44.002-05:002013-11-20T07:50:44.002-05:00They recently started separating out share repurch...They recently started separating out share repurchases that are actual distributions to shareholders and repurchases that offset shares issued under benefit plans:<br /><br /><br />would love to see this disclosed by IBM ? hclasvegashttp://brooklyninvestor.blogspot.ca/2013/11/exxon-mobil-xom.html#comment-formnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-67645962265921956522013-11-20T07:34:47.428-05:002013-11-20T07:34:47.428-05:00Hi,
That's a good point. This is an issue n...Hi, <br /><br />That's a good point. This is an issue not just for oil companies. Of course, there is nothing wrong with owning old, low cost wells/fields even though replacement cost may not be on the books. But then as you say, it won't reflect steady-state reality as those older fields get depleted they will have to be replaced with higher cost ones. For example, replacing conventional crude reserves with oil sands reserves looks OK in the proved reserves line, but the cost will be totally different. <br /><br />Over time, though, XOM has been good at capital allocation and that probably won't change, so they should do well relative to others. <br /><br />XTO is the reason the U.S. ROCE is so low. We have yet to see anything there but it ain't over yet... <br /><br />Thanks for reading. <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-73759726001462218742013-11-20T04:11:29.531-05:002013-11-20T04:11:29.531-05:00Regarding peak oil: I found this study very intere...Regarding peak oil: I found this study very interesting.<br /><br /><a href="http://belfercenter.ksg.harvard.edu/publication/22144/oil.html" rel="nofollow">Oil: The Next Revolution</a><br /><br />EddieAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-53536691638913456302013-11-19T22:56:33.646-05:002013-11-19T22:56:33.646-05:00Great post, and good for you to address this -- we...Great post, and good for you to address this -- we were scratching our heads when this was disclosed. I think XOM has the best operating record of all the supermajors, but I'm not sure I agree with some aspects of your analysis.<br /><br />Like Henry, my thoughts are around ROIC as defined by historical cost depreciation captures the full cycle costs of replacing extracted reserves.<br /><br />I posted the following on reddit SecurityAnalysis (http://www.reddit.com/r/SecurityAnalysis/comments/1qzwxz/exxon_mobil_xom/), not sure if you visit there so thought I should bring it to you...<br /><br />"I think ROIC as measured for the XOM upstream assets isn't a fair comparison to other businesses.<br /><br />Because oil and gas properties are continuously depleting, and depletion is based on historical costs (not replacement / all-in F&D costs, let alone costs of corporate acquisitions), ROIC doesn't really reflect the IRR of the business projected at a steady state if all-in F&D costs have substantially increased (with the rise in oil prices).<br /><br />Thinking about recent capital allocation: looking at their acquisition history they paid 12x trailing EBIT (i.e. 8% pretax EBIT yield) for XTO in 2009, when gas prices were WAY higher than they are today. I'm not familiar with the specific economics or development stage of the XTO assets, but I can't imagine they are earning a reasonable IRR in the present state of the North American natural gas market."Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-11028875193333473082013-11-19T21:15:01.514-05:002013-11-19T21:15:01.514-05:00Hi,
That's a good point. The XOM chart abov...Hi, <br />That's a good point. The XOM chart above shows that they generated $138 billion in free cash from the beginning of 2008 through the end of 2012. The net income in those five years totalled $181 billion, so free cash conversion would come in at 76%. I'm not sure exactly how they calculate free cash, though, as operating cash flow minus capex yields a different number. These things are hard as we don't know what's maintenance capex. <br /><br />That's why I think it's useful to just see what XOM distributed to shareholders via dividends and buybacks. That is certainly free cash flow (or we hope it approximates it). <br /><br />If you look at my 10 year table above and compare net earnings and total distributed to shareholders via dividends and buybacks, they distributed 84% of net income in the past ten years. So that's a pretty good free cash conversion. <br /><br />Thanks for reading. <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-48347550449649455492013-11-19T20:08:10.064-05:002013-11-19T20:08:10.064-05:00Good stuff as always kk!
Anyways, what's yo...Good stuff as always kk! <br /><br />Anyways, what's your thought on XOM's net income to free cash flow conversion? Oil is a capital intensive industry. XOM, CVX, BP, and the like pour billions into capex. The conversation rate is around 50-60% I believe. So in 2012, XOM reported net income of $44.9 billion and free cash flow of $21.9 billion. Wouldn't ROC be much lower if free cash flow was used in the calculation? <br /><br />I'm not sure how to analysis basic material companies. It must be since I'm still thinking on the first level. But it seems like these type of companies have extremely high capex so their free cash flows are fairly inconsistent year over year. Henryhttps://www.blogger.com/profile/07452313388704410334noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-47202091044293448832013-11-19T16:14:30.292-05:002013-11-19T16:14:30.292-05:00Yes, I didn't mention price. It hasn't do...Yes, I didn't mention price. It hasn't done much recently. If you think they can earn $8.00 or so, then it's a 12x p/e at the current $96/share which is very reasonable. That's an earnings yield of over 8%. If they repurchase shares even at the current $96, that's a nice yield which would be equivalent to a 13% pretax yield. If you think they earn $7.45 (yahoo consensus for this year), that's 13x earnings, still not bad. <br /><br />There are probably many better investments for smaller investors, but from Buffett's point of view, this is not a bad investment even at the current price, and if XOM can buy back shares at even these levels, that would be a good use of capital. Of course, investing at 20-30% would be better at XOM if possible, but huge buybacks at 7-8% earnings yield wouldn't be bad at all. <br /><br />Thanks for reading. <br /><br />And yes, I probably should've put a paragraph of the above in the post but I figured it's been trading more or less in a 'normal'-ish range for a while so... <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-87912175652228498172013-11-19T16:03:32.274-05:002013-11-19T16:03:32.274-05:00Agree with everything you said about XOM, the comp...Agree with everything you said about XOM, the company.<br /><br />The only thing you left out in the analysis is the stock price. <br />Buffett bought around 86. Not sure if it qualifies as cheap. This is probably him buying a good business at a fair price like BNSF. Anonymousnoreply@blogger.com