The oil industry is in the midst of dealing with one of the largest spills in history. The consequences could be dire for firms focused on offshore drilling, with a current six-month moratorium on drilling in the United States and a slew of new regulations and safety procedures being prepared across the globe. Prospects for the entire industry have also taken a hit.

Many investors are using the current calamity as an opportunity to pick up shares of major industry players, even BP (NYSE: BP) itself, on the cheap. However, firms directly affected by the spill face uncertain political and business risk and could remain dead money for many years to come. Another strategy is to look at other leading energy firms that have traded down because the market is painting too broad of a negative brush stroke across the industry.  

A firm down more than -10% since the spill is major integrated energy giant Exxon Mobil (NYSE: XOM). Exxon Mobil consists of a massive array of energy businesses, literally hundreds of affiliate companies and geographic locations. It also had its own major oil spill back in 1989 when the Exxon Valdez ran aground in Alaska. It took more than a decade, but the firm has learned from its mistakes and has grown into a bellwether in the industry and places a high priority on safety.           

The three primary operating units at Exxon Mobil include upstream segments that relate to the recovery and production of crude oil and natural gas, which collectively account for about 10% of total sales. Downstream consists of refining and distribution operations, which constitute the bulk of sales at about 80%. The rest relates to petrochemical operations that go into making plastics and similar specialty products.

In terms of investments, Exxon Mobil owns nearly 70% of Imperial Oil (NYSE: IMO), the largest integrated oil firm in Canada, and recently inked a deal to acquire XTO Energy (NYSE: XTO) and its appealing natural gas assets, which is a much cleaner form of energy compared to other fossil fuels. Geographically, about 30% of sales stem from the United States. Single digit percentages of sales stem from Japan, Canada, the United Kingdom and Belgium, with the rest spread throughout the world.
   
Looking at recent financial performance, 2009 was a down year as lower crude and natural gas prices adversely impacted sales and earnings. The current year should see a recovery to more normalized levels where total sales should reach nearly $400 billion, with corresponding net income of just under $30 billion, or close to $6 a share. Free cash flow should exceed $25 billion to reach nearly $4.50 a share.

Exxon Mobil generates billions of dollars in cash flow annually and has an excellent track record of deploying its capital. Mergers and acquisitions activity is a cornerstone of its growth approach. Last year, the company repurchased $19 billion of its own stock, which qualifies as an off year — it had acquired more than $30 billion in each of the two previous years. Annual cash dividends amount to $8 billion in annual payments to shareholders for a dividend yield close to 3% based on recent prices.

Shares of Exxon Mobil currently trade at a low double digit multiple of earnings and cash flow. This implies that the market doesn’t expect profits to grow very rapidly going forward. I estimate that annual growth expectations are less than +6%, which is less than half the growth Exxon Mobil has posted on average during the past decade.

Action to Take —> Near-term prospects at Exxon Mobil have been dented by the oil spill in the Gulf of Mexico, but has become an even more compelling investment play in the longer term. The stock was already undervalued but will benefit from higher oil prices, as well as the potential demise of archrival BP.  

Annual profit growth in the double digits during the coming decade could be challenging, but if Exxon Mobil can manage to grow +10% during the next five years, then the stock could be undervalued by at least -30%. This isn’t an overly high hurdle given oil and natural gas prices are arguably depressed along with global economic activity.

Further down the road, the long-term demand outlook continues to burn bright. Exxon Mobil estimates that oil will still represent 35% of the global energy supply by 2030 and that natural gas will experience the fastest growing demand out of all fossil fuels during this timeframe.