This article first appeared on GuruFocus.
Exxon Mobil (NYSE:XOM), the U.S. energy giant, generated a monster $14.5 billion of second-quarter earnings. Now oil is moving again. Exxon shares advanced roughly 1.2% Friday morning as crude prices climbed, putting the stock back in focus. Reuters reported Brent crude jumped 1.6% to $88.50 a barrel after the U.S. threatened to maintain its naval blockade against Iran indefinitely. The market math is simple: more tension around the Strait of Hormuz means more risk for global oil supply, and potentially more pricing power for Exxon.
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But forget the headline profit for a second. The cash machine underneath it is even more impressive. Exxon delivered $14.7 billion of adjusted earnings, $23.6 billion of operating cash flow and a massive $17.2 billion of free cash flow. Then it fired $9.4 billion straight back to shareholders through $4.3 billion of dividends and $5.1 billion of buybacks. That works out to roughly 72.9% of operating cash flow converting into free cash flow. Exxon also reported record Permian production and its highest Upstream production in more than two decades when Middle East disruptions are excluded. In other words, this is not just an oil-price story. Exxon is producing, generating cash and aggressively returning that cash to investors.
Here is the catch: investors are paying up for it. Exxon traded at $160.59 on August 14 while GF Value stood at just $124.79. That puts the stock 28.69% above GF Value. That is a big premium for a business whose earnings still swing with a commodity Exxon cannot control. Higher oil can keep the cash gusher running, and Hormuz uncertainty could keep crude elevated. But weaker demand or rising inventories could flip that setup quickly. Exxon looks financially powerful. The stock just does not look cheap. At nearly 29% above GF Value, the next leg higher may need more than great executionit may need expensive oil to stick around.