ExxonMobil: Cheap Oil

As oil prices have climbed to record levels, shares of energy producers and energy-service companies have surged. But stocks in those subgroups are notoriously volatile. For buy-and-hold, conservative investors, the best choice is integrated oil-and-gas king ExxonMobil, says Morningstar analyst Justin Perucki. Plus, he says, now's a good time to pick up the stock on the cheap.

Exxon is widely admired for its financial strength and operational efficiency. Its "massive scale and unrelenting pursuit of operational efficiency create a competitive advantage that the firm can bank on, no matter what path energy prices take," says Perucki. Other analysts, including Jacques Rousseau of Friedman Billings Ramsey, also like the stock in part because it isn't as sensitive to the price of oil as some of its peers, which should mean that the shares hold up better when oil prices decline.

But not everyone sings Exxon's praises. As the world's largest oil company, it takes a lot of flak for benefiting from high prices at the pump. Profits of $36 billion last year were the largest ever reported in a single year by a publicly traded company. Despite that number, Perucki notes, Exxon's stock was one of the worst performers in the energy sector in 2005. That's partly because of Exxon's enormousness and partly because the company is "always in the headlines" when the subject of gasoline prices comes up. "It's also not looked upon as the most environmentally friendly company," he adds.

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Soaring gas prices are a hot political issue, as consumers worry how they'll deal with high gasoline prices throughout the summer and beyond. Congressional leaders are calling for investigations, and President Bush on Tuesday called on Congress to roll back tax incentives for energy companies, among other things. Although Perucki acknowledges that rolling back tax incentives or increasing taxes (such as through a windfall tax) is a risk that all oil companies face, he says that smaller firms, who are not as established and not as profitable as the giants, would be hurt the most. At any rate, he emphasizes that the political banter doesn't affect Exxon's underlying fundamentals. He does say that the recent political noise is part of the reason the stock (symbol XOM) is trading below its fair value, a figure he pegs at $75 per share. The stock closed Tuesday at just below $64.

Exxon focuses on profitability, and Perucki points out that its returns on assets are the envy of the industry. The company rewards investors through a large share repurchase program and has raised its dividend more than 20 years in a row. The stock yields 2.0%.

--Lisa Dixon