Here's Why Investors Should Buy ExxonMobil Stock Right Away

Oil price has improved from the historical lows of February 2016. From $26.21 a barrel — the lowest since 2003 — crude jumped to $58.11 on Nov 27. With the problem of supply glut easing, big energy players are generating more cashflow for shareholders.

One such promising stock is ExxonMobil Corp. (NYSE:XOM) , which has plenty of upside potential.

Over the last nine months, this energy giant generated $5 billion from upstream operations, higher by $4.2 billion from the year-ago period. This clearly reflects the improvement in ExxonMobil’s upstream business on rising crude price.

Moreover, in a bid to strengthen its overall operations, the company has been investing heavily in its extensive refining businesses, which will likely help it counter volatility in its upstream businesses.

ExxonMobil has an impressive earnings surprise history. The firm, belonging to the Zacks Oil International Integrated industry, managed to surpass the Zacks Consensus Estimate in three of the last four quarters, the average positive earnings surprise being 8.8%.

All these developments reflect ExxonMobil’s strong and stable operations that will probably help it continue to return steady cashflow to shareholders. We have employed three parameters to gain a clearer picture of the company’s operations.

Strong Potential to Generate Cash Flow

Investors look for indicators that gauge the ability of a company to generate free cash flow from investments. For this purpose, we have used the free cash flow yield ratio. Companies with strong operations generally have high free cash flow yield, indicating that the amount of money investors are generating is more than the amount spent to buy the stock.

Our proprietary model shows that free cash flow yield for ExxonMobil stands at 4.4%, way higher than 2% and 0.1% for integrated energy majors Chevron Corp. (NYSE:CVX) and PetroChina Company Ltd. (NYSE:PTR) , respectively.

Sufficient Funds to Meet Capital Expenditure

We calculate a company’s free cash flow after deducting capital spending from operating cash flow. Over the last four quarters, free cash flow for ExxonMobil was $15.263 billion, indicating that the firm has sufficient cash flow to fund capital spending. In other words, ExxonMobil generated $30.051 billion in net cash from core operations, while its capital spending amounted to $14.788 billion.

Healthy Balance Sheet

From the debt-to-capitalization ratio, it is clear that ExxonMobil has significantly less reliance on debt than Chevron. The debt-to-capitalization ratio of ExxonMobil presently stands at 11.6% compared with 23% of Chevron.

ExxonMobil also has lower long-term debt despite its market capitalization being almost 1.6 times higher. The company’s long-term debt load, as of Sep 30, stands at $24.869 billion, much lower than $34.075 billion for Chevron. Also, ExxonMobil’s long-term debt is substantially lower than $56.893 billion for BP Plc (NYSE:BP) and $79.681 billion for Royal Dutch Shell (LON:RDSa) plc RDS.A.

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