Chesapeake Energy Corporation (CHK), Exxon Mobil Corporation (XOM): Don’t Ignore The Risk In Upstream Firms

A Better Looking Balance Sheet

Exxon Mobil Corporation (NYSE:XOM) doesn’t sound as exciting as a high-growth and unconventional upstream firm, but ExxonMobil’s strategic planning capabilities shouldn’t be ignored. The company has almost no debt with a total debt to equity ratio of 0.07. It is involved in the natural gas market and its interests in LNG export facilities give it relatively stable income.

It is working on LNG facilities in Papua New Guinea and Australia’s Gorgon Jansz. The company also has a strategic relationship with Qatar Petroleum. Exxon Mobil Corporation (NYSE:XOM) offers its decades of experience and will profit from the toll-road like nature of LNG exports. At the same time, this partnership helps Exxon Mobil Corporation (NYSE:XOM) to get around America’s hesitation to approve new LNG export facilities.

It is highly unlikely that Exxon Mobil Corporation (NYSE:XOM)’s shares would quadruple in the next five years, but its return on investment of 27.4% offers safe and steady returns. At a 2013 forward P/E ratio around 11, Exxon Mobil Corporation (NYSE:XOM) pays dividend at a reasonable valuation that is supported by profitable and diversified business operations.

Conclusion

Exxon Mobil Corporation (NYSE:XOM)’s yield of 2.8% isn’t sky shattering, but it is a good deal in today’s income constrained environment. In the long run it is better to stick with a safe dividend backed by a well-managed company, than underestimate the risks in higher yielding firms. Encana Corporation (USA) (NYSE:ECA) and Chesapeake Energy Corporation (NYSE:CHK) both carry substantial debt loads. Given the volatility in commodity prices, these firms’ dividends need to be treated carefully.

Joshua Bondy has no position in any stocks mentioned. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy.