Isaac Toussie Opines on Exxon as Profitable Investment for Many Portfolios

Exxon is one of the largest oil companies in the world. It’s market-cap is over 370 billion dollars and has over 63,000 employees worldwide. A well-known oil entrepreneur and deal organizer Isaac Toussie has made some critical analyses of an investment in Exxon. Toussie focused on two main benefits of Exxon that make it an appealing investment: a low debt to EBITDA ratio and extremely high replacement costs of its infrastrcuture.

Many modern-day companies are funded heavily by debt. A healthy company will have debt, but a level of debt that they can pay off over time. Over-leveraged corporations are riskier, as they have a higher likelihood of default and bankruptcy. Companies with the ability to pay off their debt are valuable. One metric in analyzing a company’s ability to pay off their debt is by looking at a company’s debt to EBITDA ratio. EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a calculation of a company’s bare-bones earnings. When compared to debt, a lower debt to EBITDA ratio shows a company’s ability to pay off debt.

Over the last 5 years, Exxon’s has remained at a very low level. At the close of each calendar year, Exxon’s debt to EBITDA ratio starting from 2017 has been 1.2, .8 (2018), 1.3 (2019), 3.5 (2020) and .9 (2021) (Finbox, Exxon Net Debt to EBITDA). Exxon’s debt to EBITDA ratio continues to drop considering the drastic rise in earnings that many oil companies have benefited from this past quarter. With a debt to EBITDA ratio below one, Toussie accentuated the viability of an investment in Exxon.

The second factor that Toussie mentioned was the high replacement costs of Exxon’s equipment. Oil companies require massively expensive equipment with the ability to extract, store and ship enormous amounts of natural gas (eliminate the line the equipment costs millions). If infrastructure is damaged, Exxon must spend vast amounts of money to do so. For a company as large and as experienced as Exxon, this does not pose a problem that they are not equipped to handle. However, for smaller competitors, the replacement cost of equipment can be a cost that forces a closure or bankruptcy. Exxon’s large size and its ability to cover such costs gives it an advantage in the field and helps it maintain its status in the industry.

This article is presented for informational purposes only and should not be relied upon as financial or other advice.