Exxon Mobil Corporation (XOM) May Continue to Underperform

Lately, the market hasn’t been treating Exxon Mobil Corporation (NYSE:XOM) with a lot of respect. The oil and gas supermajor has noticeably underperformed the broader equity markets in the last 24 months. To give investors a perspective, this is how Exxon Mobil Corporation (NYSE:XOM)’s stock performed since July 2011:

XOM data by YCharts.

Compare this with the stock’s performance for the previous eight years — from July 2003 till July 2011 — and it looks like this:

XOM data by YCharts.

To summarize, Exxon Mobil Corporation (NYSE:XOM) underperformed the broader markets dramatically in the last two years.

I also calculated the stock’s effective annual yield over the various holding periods, along with a comparison to S&P 500. There are two sets of data: The price return is the effective annual yield calculated using the stock price appreciation only, while the total return is the corresponding effective annual yield with reinvested dividends. Here’s how the figures compare:

Source: Morningstar; author’s calculations.

What’s the big reason behind these diminished returns? And more importantly, will this stock continue to underperform in the foreseeable future? With fewer than 10 days before Exxon Mobil Corporation (NYSE:XOM) reports its second-quarter results, Foolish investors should be concerned whether this stock is worth a place in their portfolios.

The crux of the problem
For a company whose market capitalization is north of $400 billion, the answer isn’t so straightforward. However, the unmistakable signs of declining profitability are hard to ignore. A cursory look at the company’s profit margins for the last five years does not reveal much. However, upon delving deeper, the cash flow statements reveal a trend that long-term investors need to be wary of: Over the last five years, net cash used for investing activities has doubled from about $15 billion a year to more than $30 billion a year.

Many might argue, especially those in management, that this isn’t necessarily a bad thing. Larger investments should translate into higher production volumes in an era of increasing global demand as well as competition. Additionally, investment horizons in the oil and gas industry are pretty long — in fact, a matter of decades.

While these arguments are fair, profitability ultimately boils down to margins per barrel of oil extracted and sold. And that’s where it seems like a problem. The following chart depicts Exxon Mobil Corporation (NYSE:XOM)’s 10-year growth in revenue and capital expenditure over the last 10 years.

XOM Revenue 10 Year Growth data by YCharts.