November 2009 Archives

I will discuss the Pan American Silver Corp. (PAAS) third quarter conference call held on 11 November 2009 by providing the conference call's major themes in point form. Because I believe the company is well managed by seasoned and competent professionals and because of my concern with potential inflation, Pan American Silver remains one of my core holdings.

In addition to transcripts of the company's conference call (see Seeking Alpha for the transcript), I used the company's press release with financial highlights (PDF, 49 kb). The press release is well worth reading for a quick snapshot.

General Comments

• New quarterly record silver production of 6.4 million ounces, up 31% from same quarter last year and up 10% compared to second quarter 2009.
• New quarterly record gold production of 28,000 ounces, up 12% from same quarter last year. Gold is the most significant byproduct, accounting for almost 20% of total revenues.
• Consolidated cash costs declined 26% to $4.91 per ounce, which is well below the company's full forecasted amount of $6. The company has managed to keep its cost savings that it created earlier this year.
• Cash flow from operations before working capital adjustments was $43 million or $0.50 per share. Pan American had net income of $17.4 million or $0.20 per share, an increase of 172% from third quarter last year and $7.2 million higher than second quarter this year when it was in crisis mode.

Manantial Espejo, Argentina

• Company very happy with its results thus far.
• Over 1 million ounces of silver at a cash cost of negative $3.11 per ounce, which is the result of over 20,000 ounces of gold production that more than covered all operating costs. Remember, byproducts are treated not as revenue but rather as negative costs.
• Pan American solved its mechanical problems (failed grinding mill motor), and the mine processed nearly 170,000 tons of ore.
• Silver mill feed was 214 grams per ton, of which 88% was recovered, just shy of the company's expectations. The shortfall, however, was more than compensated by better than expected gold grade of 3.9 grams per ton and better than expected gold recoveries of 95%.
• Pan American expects slightly improved performance in the fourth quarter at similar cash costs.

Peru

• Produced just above 2 million ounces of silver at a cash cost of $8 per ounce of silver.
• Higher base metal prices helped to offset the Doe Run smelter closure in Peru.
• Company expects that its production will increase by about 10% from the current 910,000 ounces of silver per quarter to close to one million of ounces of silver per quarter with costs decreasing from $10.35 to $7.50 per ounce.
• Pan American is pleased with its Morococha mine where it is producing at nearly 750,000 ounces of silver at a cash of $5.33 per ounce. Company expects similar results for a substantial, but undisclosed, period.
• The Quiruvilca mine is operating at reduced yet profitable conditions. It produced more than 360,000 ounces of silver at a cash cost of $7.69 per ounce. The cash costs include capital expenditures, which are expected to continue into early 2010.

Mexico

• Alamo Dorado mine produced 1.6 million ounces of silver at a cash cost of $4.37 per ounce. Gold production was nearly 5,000 ounces versus expectations of only 3,000 ounces.
• Production rates will decline for Alamo Dorado. Expectations for the fourth quarter are one million ounces of silver. This rate will extend to mid to late 2010. Production should increase again as high grade ore from Phase II pit is used.
• La Colorada mine produced 885,000 ounces of silver at a cash cost of $7.92 per ounce.

Bolivia

• San Vicente produced over 870,000 ounces of silver at a cash cost of $5.81.
• Ramp up continues ahead of expectations with the plant processing just over 600 tons per day against design capacity of 750 tons per day.
• Higher grade ores are being mined.
• Winterization projects have been completed. Mineworkers are gaining confidence in the plant's operation as their familiarity has increased.
• The mine expansion and plant construction has brought economic benefits to the local community of San Vicente.
• Company believes that its success at San Vicente is viewed positively in the country and that it might provide additional incentives for further foreign investment into a region that desperately needs more economic activity.

Exploration

• I did not provide a detailed summary of the exploration portion of the conference. While it is vitally important, it is specialized information. Please consult the transcript for more detail.
• Key comment from the transcript is as follows: "All of this new information will included in general reserve and resource update, which I will share with you in January 2010. I'm confident that once again, we will more than replace all of the resources ounces we've mined in 2009."

Financials

• Pan American reported record sales of $118.6 million, a 49% increase from a year ago. This increase is attributable to record silver and gold production and strong silver and gold prices.
• Mine operating earnings were $34.7 million, more than double last year's value and up 48% from last quarter. Net income was $17.4 million, which translates to $0.20 per share, again more than double last year's value and up 70% from Q2.
• Cash flow from operations before working capital adjustments was $43.3 million. With reduced capital expenditures of $5.8 million, the company banked $28 million.
• The prior results would have been even stronger had the company been able to sell more of its metals. Concentrate shipments and the Doe Run refining schedules resulted in a buildup of inventory.
• The addition of high margin production from Manantial Espejo and San Vicente mines and the continuation in and recovery of strong metal prices helped boost the company's results. The average margin per ton of ore milled has gone from $10 in Q4 2008 to $53 in Q3 2003. Moreover, the total number of tons moved has increased by 50% over that same period.
• Sales increased by $39.1 million from the third quarter 2008. This results almost entirely from increases in the quantities of silver and gold sold, which increased by 30% and 450% respectively.
• Working capital increased by $41.6 million to $258 million. Most of the increase in working capital is higher cash and short term investment balances, which rose $37.1 million to $150 million. The Doe Run concentrated inventory increased during the quarter, which added an additional $10.3 million to working capital.
• Company has no debt.
• With the construction of Manantial Espejo and San Vicente accomplished, the capital expenditure for the third quarter on property, plant and equipment was only $5.8 million.
• The Doe Run of the La Oroya smelter situation has improved. It was closed during the third quarter and remains closed today. Doe Run was a larger buyer of the company's copper concentrate production and only buyer of the stockpile material. The company has been able to sell a couple of concentrates shipments to other buyers during the third quarter 2009. Because other financial terms were inferior, an added $1.35 per ounce of cash costs were incurred at the company's Huaron mines. The company believes that recent developments surrounding Doe Run have been positive. It expects that the smelter will resolve its financing requirements and resume operations in the first half of 2010. Moreover, the company retains a debt provision of $4.4 million in the second quarter related to accounts receivable from Doe Run.

Closing Comments

• Company remains positive: maintaining 2009 production forecast of 25.1 million ounces of silver at or better than $6 per ounce cash costs.
• More than double, nearly triple gold production at 85,000 ounces.
• Company has discovered an exciting new extension at the MCTU zone at the La Colorada mine. Good things should result.
• Progress is being made at Manantial Espejo and the company is targeting a full feasibility study by year-end. There are several new exploration targets.
• Company has a defined silver resource La Preciosa with an excess of 135 million ounces of silver in Mexico. The location is within an hour of its existing infrastructure in Durango. It is well positioned to take advantage of this opportunity.
• The friendly takeover of Aquiline Resources Inc. will create value for shareholders of both companies. It will combine Pan American's financial strength and proven mine development expertise with Aquiline's work class primary silver deposit Navidad. Because of the company's success in working in Argentina, being able to address local and political sensitivities, the company is well positioned to move Navidad forward. With La Preciosa and Navidad, Pan American will possess a strong growth pipeline.

Questions and Answers

Much of the question and answer was related to detailed mining operations information. There was one question related to the company's hedging policies.

The company's philosophy firstly on silver is not to hedge the exposure that we have to silver. So our hedging program is really confined to byproducts particularly base metals and from time-to-time currencies. The moment we have a very small residual zinc program in place, which runs out at the ends of December and the same that goes to our currencies.

We have a small Mexican peso and Peruvian sol position, which also in December. So for 2010, we actually won't have any hedge positions open. However, the subcommittee of the Board of Directors and the Hedge Committee does review those businesses from time-to-time and we maybe adding to them depending on the circumstances.

The company receives spot prices for its gold byproducts.

My Overall General Impressions

Please note that you can click though each chart above to see full sized images.

One of the hedge fund managers that I follow is Bill Fleckenstein of FleckensteinCapital.com (subscription site). Fleckenstein has been extremely critical of central bankers and in particular Greenspan (see Greenspan's Bubbles: The Age Of Ignorance At The Federal Reserve), who served as Chairman of the Federal Reserve of the United States from 1987 to 2006. Because of the Fed's prior and current policies and actions, Fleckenstein has been and remains bullish on precious metals and some mining companies. Please note that he is a director of Pan American Silver.

As an aside, for all those who wish to listen to a few podcasts featuring Bill Fleckenstein, you can listen to Eric King's interviews.

As I indicated in my prior article (Pan American Silver 2Q 2009 Conference Call), I believe that Pan American is an extremely well managed company. Like Fleckenstein and others, I further believe that with the massive money printing by central bankers, excess liquidity might manifest itself in higher commodity prices, especially in silver and gold prices.

One concern that I have, though, is that the stock price of a mining company sometimes underperforms the price of the commodity being mined. Jim Rogers, who wrote Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market, stressed that it is often better to buy the actual underlying commodity rather than a mining company. His rationale is that when you invest in a company, you then have to worry about such things as management, confiscation through rising royalties and taxes, environmental regulations, increased labor costs, increased energy and other input costs, political disruptions and many other similar factors. These problems sometimes cause a company's share price to underperform the price of actual commodity itself. When compared against Pan American Silver's share price over the past two years, iShares Silver Trust (SLV) shows superior performance. iShares Silver Trust is an ETF that tracks the price of silver.

As an aside, iShares Silver Trust has 293,087,484.400 ounces of silver in trust as of 22 November 2009. On 12 September 2007, slightly more than two years ago, iShares Silver Trust had roughly 139 million ounces in trust.

A cautionary note, however, with the two year comparison chart. Comparisons are often highly dependent upon the start date and duration. Changing either or both will often result in an opposite conclusion.

My impression is that Pan American lost ground to iShares Silver Trust in October through November 2008. Since then both price lines have been highly correlated. I suspect that if silver and gold metal prices were to rise quickly, all other things being equal, then Pan American would benefit more than iShares Silver Trust because other Pan American Silver's input costs would remain reasonably stable. If silver and gold prices were to rise slowly, however, then I am less certain which would benefit more.

Against this two year historical backdrop where the iShares Silver Trust share price outpaced Pan American Silver's share price, however, are the company's plans to add more low cost production, which should favor Pan American Silver's share price. I expect that, after the friendly takeover of Aquiline is complete and during its fourth quarter conference call early in 2010, the company will provide more details on its plans to expand production.

The key point from this discussion is that sometimes investing in an underlying commodity is better than investing in a mining company.

Unless my fundamental outlook changes or Pan American Silver begins disappointing, it will remain a core holding. On Friday, 20 November 2009, Pan American Silver stock price closed at $24.88.

Disclosure: I am long Pan American Silver Corporation shares. As part of the Amazon Associate program, I receive remuneration for each book sold by clicking on the Amazon.com links in my article.

While biking around the Glenmore reservoir in Calgary on 18 July 2009, I saw some people sailing in their boat hi9. If you click on my Flickr profile link, you will be taken to Flickr where you can see more of my pictures.

Preface

For those of you who don't know, Adam Warner writes the excellent and influential blog Daily Options Report. I began reading his writing when he co-wrote the options column on Street Insight (part of the TheStreet.com family) from spring 2003 to spring 2005. He is currently Options Editor at Minyanville.com. You can read his profile at his About on his blog.

Readers should know that I correspond occasionally with Adam Warner and that I respect him. I have learned a tremendous amount from his articles and from his answers to my questions. Moreover, I admired his warning readers that they might wish to exercise caution when following Lenny Dykstra's options articles on The Street.com. His warnings were long before Dystra's problems became fodder for the mass media, including CNBC. Adam is a friend and thus some might consider my book review biased.

Overall Summary

I use options in my trading and investing. However, I am not a sophisticated options trader who rebalances his delta hedge on an hourly or daily basis. Instead, I tend to use options to profit from the view I have of the markets or a stock.

As part of my on-going learning, I do read about options on websites, newspapers, and blogs. I read about options traders taking advantage of gamma, and, although I had a sense of what they were doing, I was never clear. After reading Adam Warner's book Options Volatility Trading: Strategies for Profiting from Market Swings, I have a solid understanding.

I thoroughly enjoyed this book because it was like having a conversation with Adam, where he gave me a tutorial on how he thinks about options and how he trades them. He could easily have used complex mathematics, charts and diagrams, overly complex strategies to confuse most readers. Instead, he chose a conversational tone with sufficient material that most options readers would readily understand.

If you are brand new to options, this book might not be the proper entry point. Instead, you might wish to view the learning tutorials covered by Options News Network, an online site dedicated to, surprise, options.

If, however, you have a reasonable understanding of options, then you will find this book invaluable. By reasonable understanding of options, you know what a put and a call are and can describe them. Moreover, you have a rough idea of the Greeks, though Warner does provide a quick snapshot of the Greeks in his book. You don't require a strong or thorough understanding, just a reasonable understanding, to benefit from reading this book.

As fair warning, I did read some sections slowly and more than once. However, when I learn new material, I often read sections slowly and more than once. I learn better using this technique.

After reading Warner's book, I am much more comfortable in reading options articles. For example, when authors talk about the VIX, I am knowledgeable about the VIX, how it works, how to interpret it, and its shortcomings. I have a better appreciation of which options strategies to employ when.

Now that I have read this book, do I plan to become an aggressive options trader? I do not think so. Will I use strategies discussed in this book to enhance my returns? Yes, absolutely.

Is this book a worthwhile investment? Yes, most definitely. Even if the only benefit you derive is being able to understand options articles better than you did before, the book is a worthwhile investment. My knowledge is much stronger than it was before. And, I know that will profit from the knowledge and strategies discussed in the book.

I highly recommend Options Volatility Trading: Strategies for Profiting from Market Swings—Five Stars.

Introduction

Adam Warner sets out the tone of the book where he explains that he will focus on volatility and the VIX. You will learn how to measure volatility or how to manage an active account or an investment portfolio with an ever-changing set of backdrop conditions.

Chapter 1: Who Am I? Why Am I Here?

From August 1988 until the 2000 timeframe, Warner worked as a Market Maker on the floor of the Amex Options Exchange. He describes his experiences and how the Amex changed during his tenure. My most important take-away is that Warner had to think quickly on his feet. Thus, through his experiences, he not only understood the technical aspects, but also gained an intuitive feel. I like that the author has achieved a wealth of knowledge and confidence.

Chapter 2: Know Your Greeks

Warner provides a quick high-level tutorial on the options Greeks. If you are looking for a thorough, rigorous text discussing the intricacies of the Greeks, then you'll need to consult other texts. His purpose in this chapter is to ensure that you have sufficient knowledge to understand the rest of the text.

As part of his quick overview, he teaches you how to think about your position sizing by using delta. That is, convert your option exposure through delta into a stock position. Given your portfolio, is your option size reasonable? While options can employ leverage to positive effect, they can, if you are not careful or have a string of poor luck, destroy your portfolio. He cautions readers to ensure that their positions are not outsized for their portfolios.

Here's a mental model that helped me:

• Delta - Useful for sizing and judging risk exposure.
• Theta - The slope on a hill while driving or biking. Either it is a positive force driving forward or it is a negative force that you need to overcome through trading.
• Gamma - Represents the energy or power. If I have lots of gamma at my disposal, I can more readily overcome theta.

Chapter 3: Understanding the VIX

Warner provides a high level overview of the VIX. As part of his overview, he instructs you on how you should view and make sense of iVolatility.com historical and implied volatilities. He also provides some historical contexts and provides some quirks with the VIX.

Chapter 4: Nuts and Bolts VIX

This chapter picks up from the last and provides more detail. Warner teaches you how to interpret the VIX in that it provides an expectation, not a guarantee of future price movement. Moreover, market volatility expectations are formed from the volatility of individual stocks and their correlation.

Chapter 5: Volatility Timing

Not all days are created and not all months are created equal. Warner uses historical analysis to help guide you when it is usually better to buy and sell options.

Chapter 6: How Do Traders Trade Volatility

In general, net selling options at a higher volatility and net buying options at a lower volatility than they ultimately realize is profitable. However, active trading is often required. Warner discusses how often you should rebalance your delta hedge among other considerations.

Because of my style of trading options is so much different from Warner's volatility style, I found this chapter particularly rewarding and helpful.

Chapter 7: Options and the Quarterly Earnings Report

Often you hear analysts say, "Stock ABCD is expected to move X%, either up or down, after the bell when it releases its earnings."

This chapter teaches you how you can determine for yourself how much the stock is expected to move. This knowledge is helpful whether you are an option or stock trader. If your expectations are different from that of the market, you can play accordingly. But, as Warner mentions, you have to be prepared to defend your position and take your medicine when the markets surprise you.

Chapter 8: Like the Weather--The Trader VIX and Why It Doesn't Do What You Think It Does

For those that don't understand them well, VIX, VIX futures, VIX Options on Futures, and VIX ETNs are complex and confusing. After reading this chapter, I have a clear understanding of how these instruments work. Consequently, I will take Warner's advice not to use them. Instead, as he suggests, I will keep it simple by using a different set of common indexes and ETFs.

With all the discussion in the media about VIX and fear index and how people might want to protect themselves against volatility, investors and traders should understand VIX. I suspect a surprising number do not.

Chapter 9: Ratio, Ratio

Put call ratios should be interpreted and used with caution, especially for individual stocks. By themselves, they could indicate any number of scenarios, and for you the trader, it is often difficult, if not impossible, to understand which scenario is at play.

Chapter 10: We're (Pin) Jammin'

Warner discusses the circumstances that make pins more likely. A pin is where a stock expires at a strike price. If you knew in advance where a stock would be pinned, then you could profit from this knowledge.

Chapter 11: Myth-Busting and Other Assorted Options- and Expiration-Related Stats

There are several urban legends related options and options expiry. Warner examines a few of them and provides you with his analysis. For example, we often hear that expiration week is more volatile? Is that true, and if so, how can you profit from it?

Chapter 12: Buy-Write--You Bet

I found this chapter surprising because the results were exactly counter to my expectations. A buy-write is when an investor or trader buys a stock and sells a call. The call provides extra income while limiting potential capital gains. Under what circumstance is it advantageous to engage in buy-writes?

Chapter 13: Strategy Room

This is a great chapter because Warner provides his thoughts and analysis on some common strategies such as:

• Naked Put;
• Bull Call Spread;
• Bear Put Spread;
• Backspreads;
• Calendar Call Spread;
• Backspread and Calendar Spread Combined;
• Butterfly Spread;
• Iron Butterfly;
• Condor;
• Iron Condor;
• Synthetics; and
• Dividend Plays.

Armed with this knowledge, you are better equipped to think about which strategies you want to employ under various circumstances.

Chapter 14: Ultra and Inverse ETFs

I found this chapter surprising, because even though I am well versed in how double and triple exchange traded funds (ETFs) work, I didn't realize the size and scope of some of these ETFs. If you don't understand how ultra and inverse ETFs grind your results down over time, you definitely need read and understand this chapter. And perhaps you'll be surprised too at how important these ultra and inverse ETFs have become to the markets.

Chapter 15: Chartin' Them Derivatives

Many investors have profited by using technical analysis. In this chapter, Warner cautions traders not to employ the same methodology to derivatives. Under certain circumstances, it might provide some additional guidance around the edges.

Chapter 16: Plus Ticks and Other Rules

The key theme in this chapter is that you must trade the market you're given, not the market you would like it to be. Whether you agree with the plus tick rule for shorting stocks is irrelevant. Trade the market with rules as they exist.

Disclosure: As part of the Amazon Associate program, I receive remuneration for each book sold by clicking on the Amazon.com links in my article.

On Thursday, 4 June 2009, I photographed Ana Avramovic at Heritage Park in Calgary Alberta. If you click on my Flickr profile link, you will be taken to Flickr where you can see more of my pictures.

On 14 November 2009, The New York Times published an article Water Found on Moon, Researchers Say (free registration might be required). I found that interesting because wherever there is water here on earth, there is life. Even in the most inhospitable places on earth, where there is water, there is usually life. So now that we have found water on our own nearby moon, is water found with abundance throughout our universe?

As a kid, I was never satisfied with the notion that life only exists on earth. Other stars and planets are so far away for us to understand them well. How could scientists and others possibly have concluded that life does not exist elsewhere? I wonder if our educational system still teaches students that earth is the only planet that supports life. I hope not, because I have confidence that someday we will find life existing elsewhere within our universe.

Late last week, over at the Edge.org, I viewed an interesting video presentation on Why Does The Universe Look The Way It Does. I particularly enjoyed his discussion on why there might be more than one universe.

Why do we find ourselves so close to the aftermath of this very strange event, this Big Bang, that has such low entropy? The answer is, we just don't know. The anthropic principle is just not enough to explain this. We really need to think deeply about what could have happened both at the Big Bang and even before the Big Bang. My favorite guess at the answer is that the reason why the universe started out at such a low entropy is the same reason that an egg starts out at low entropy. The classic example of entropy is that you can take an egg and make an omelette. You cannot take an omlette and turn it into an egg. That is because the entropy increases when you mix up the egg to make it into an omelette. Why did the egg start with such a low entropy in the first place? The answer is that it is not alone in the universe. The universe consists of more than just an egg. The egg came from a chicken. It was created by something that had a very low entropy that was part of a bigger system. The point is that our universe is part of a bigger system. Then you can start to try to understand why it had such a low entropy to begin with. I actually think that the fact that we can observe the early universe having such a low entropy is the best evidence we currently have that we live in a multiverse, that the universe we observe is not all that there is, that we are actually embedded in some much larger structure.

If this science material interests you at all, I encourage you to read The New York Times article and watch Sean Carroll's video. It's fun to ponder where we came from and why are we here.

On Thursday, 4 June 2009, I photographed Ana Avramovic at Heritage Park in Calgary Alberta. If you click on my Flickr profile link, you will be taken to Flickr where you can see more of my pictures.

Please click through for a full-sized chart.

The following quote came from today's Wall Street Journal article Less Sparkle at Blue Nile (subscription might be required).

Yet Internet traffic data suggests Blue Nile's competitive position may be eroding. The number of "unique monthly visitors" to its site dropped 39% in October to 281,000, compared with a year earlier, according to comScore. That took Blue Nile out of comScore's top 10 jewelry and luxury goods Web sites. Over the same period, visitors to Web sites operated by offline retailers Zale, Tiffany and Kay saw declines ranging from 6% to 18%.

Blue Nile says comScore's data "is completely wrong." But data from another Web-measurement firm, Compete, also shows a decline--of 17%--but growth in rivals' traffic.

I find that information from the two web measurement firms interesting. According to comScore, traffic to Blue Nile (NILE) is down nearly 40%, while Compete it's down 17%. What's a factor of two, or nearly 20% in absolute value, between friends? And then comScore says Zale, Tiffany, and Kay saw declines between 6% - 18%, while Compete says it saw growth in the rival websites. And to make matters more confusing, Blue Nile says comScore is wrong.

So how do we make sense of this? Let's look at Google Trend data, as shown in the chart above. There are several things that jump out at me. One, searches for Blue Nile, engagement ring, diamond ring, and wedding ring have all trended down. Two, the relationship among all four items appears reasonably constant over time. And three, every fourth quarter, there is a spike for search terms Blue Nile and Diamond Ring. We are midway into the fourth quarter now.

Recall Blue Nile's third quarter conference call article. In that article, I showed a chart with the quarterly revenues clearly shown. As seen from that chart, the fourth quarter is where most of the revenue for the year occurs. And on the conference, Blue Nile raised its guidance for this year's fourth quarter. A quote from the company's press release as is follows:

"The trends in the business during the third quarter improved sequentially, and we project that trend to continue in the fourth quarter. Based on our third quarter results and our expectations for the fourth quarter, we are raising our guidance," said Marc Stolzman, Chief Financial Officer. "We are projecting fourth quarter net sales between $100 million and $109 million, and diluted earnings per share in the range of $0.35 to $0.39."

The company's quarter ended on 4 October 2009, and the conference call was on 5 November 2009. Therefore, Blue Nile had about one month's data into the fourth quarter before issuing its raised guidance.

Given that I don't see a 40% drop in Google searches, that the two web measurement firms see wildly different results, and that the company raised its guidance for the fourth quarter only ten days ago, I am skeptical of the web search firms' findings.

Disclosure: I am long Blue Nile stock.

Barron's cover story this week is What a Gusher! (subscription might be required), an article about Exxon Mobil Corporation (XOM). Given that I am net long Exxon Mobil and that I wrote two articles recently on oil, I enjoyed reading Andrew Bary's well written article.

As an aside, my recent two prior articles are Do Not Believe Long Term Oil Forecasts and Long Term West Texas Intermediate Forecast Price And Uncertainty. Both articles were popular and generated some lively comments over at Seeking Alpha Don't Believe Long-Term Oil Forecasts and Don't Believe Long-Term Oil Forecasts: Part II.

While I encourage you to read the full article in Barron's, I will provide a few quick highlights.

Although Exxon Mobil is well managed, it is second from the bottom in Dow performance this year. Some suggest that fair value for Exxon Mobil is $90 per share. At present prices, the refining and chemicals divisions are being given away. Exxon is known for its financial discipline where it focuses on profits, not on production. Consequently, it enjoys the highest return on invested capital at 34%. Moreover, because of its discipline, it does not enjoy feasts of activity during the good times, or famines during the bad. Instead, it remains focused on its planned activities. It has replaced more than 100% of its production during the last 15 years at an average cost of less than $7 per barrel, which is below that of its peers'. During the past five years, Exxon has favored stock buybacks over dividends.

As the leading energy company with the most diversified revenue base, Exxon is the most defensive play in its group, which includes BP (BP), Chevron (CVX), ConocoPhillips (COP) and Royal Dutch Shell (RDS-A). Exxon's defensive characteristics and sheer size have worked against it because aggressive institutional investors now favor oil-and-gas-exploration stocks like Apache (APA) and XTO Energy (XTO), or oil-service stocks like Schlumberger (SLB) that offer more leverage to rising energy prices.

...

It isn't easy to maintain, let alone increase, such production, particularly because Exxon and its international rivals face a diminishing set of opportunities, given increasing resource nationalism in the Middle East as well as in places like Venezuela and Russia. It's estimated that 85% of the world's oil reserves are locked up in OPEC countries and the former Soviet Union, where access comes on tough terms to Western oil companies, if at all.

In my prior article, I wrote:

And, the rise of oil prices has given new prominence to some national oil companies. A sample, though incomplete, list of companies include: Gazprom OAO (OGZPY.PK), Petróleos de Venezuela, S.A., and Petróleo Brasileiro S.A. - Petrobras (PBR).

Because the Barron's article is a great summary of Exxon Mobil, I have printed and saved a copy for future reference. I encourage you to do the same.

Disclosure: I am long Exxon Mobil stock as well as long and short puts for an overall net long position.

On Saturday, 18 July 2009, I photographed two young men fishing at Glenmore Reservoir in Calgary Alberta. If you click on my Flickr profile link, you will be taken to Flickr where you can see more of my pictures.