Looking for Stability and Long-Term Profits in Oil
The correction in the oil sector has been difficult. Brent crude, the price paid around the world for most oil, is down over 20%. The dramatic increase in supply from America’s fracking boom has seriously depressed prices.
Saudi Arabia is upset that it’s playing second fiddle in raw oil output, and it has opened up the oil spigot in hopes of recapturing the production crown. There’s some reason to believe the Saudis’ actions will have some impact.
This is a perilous time in the oil and commodity sector. When times get tough, look to the largest oil companies to outperform their more speculative brethren. Exploration and production (E&P) firms with a smaller footprint have had their share prices fall much more than the price of oil.
Many of these smaller E&P firms have been spending more on drilling than they recoup on oil sales. They make up the difference in the debt markets.
Indeed, Wall Street has been overinvesting in the American oil boom, and now we’re about to see the bust.
Saudi Arabia understands this dynamic, as it has some of the least-expensive crude production on the planet. It also understands that many of the high-tech wells drilled in the United States aren’t profitable when oil is $80 per barrel.
The rig counts are already starting to fall across the United States, and if oil prices remain this low for an extended period of time, it’s likely that some of these highly leveraged firms won’t make it.
Exxon Mobil Will Be Your Shelter in the Bust
At times like these, a firm such as Exxon Mobil (XOM) can provide you safety and a place to benefit dramatically when the long-term uptrend in oil prices reasserts itself.
Currently, Exxon Mobil is trading below $100 at $96.59. At this price, you can buy a firm that’s extremely profitable (with nearly $8 in profits per share) at a substantial discount.
Plus, Exxon has a history of paying shareholders well. The dividend is 2.86%, and the company is in the midst of a large $3-billion share buyback.
Even more exciting is that while earnings-per-share growth is challenged because of the lower commodity prices, Exxon’s financial strength gives it the cash flow to cover the dividend and buyback. No need to seek more debt at this super major.
The margins at XOM have been improving. Its natural gas production is slowing, and with a program in place to sell secondary assets, it’s moving to projects with higher margins.
I recommend buying these shares anytime they fall below $100. And when the market for energy shares recovers, Exxon will lead the way.
Unlike E&P firms, Exxon has the cushion of having a multitude of businesses. Only about 40% of the earnings of the firm come from the sale of crude oil. Natural gas makes up 17% of its business, and I continue to be bullish on gas prices long term. Meanwhile, 16% of its profits come from the chemical business. Petroleum products comprise 14% of business. And the final 14% of its business is from gas and power marketing.
XOM shares are the type of shares you put away, and give to your heirs. Generations of America’s elites have been doing it since the firm was founded by John D. Rockefeller way back in the 19th century. Exxon is the best of the Standard Oil firms, and it continues to be extremely well managed.
At Constitutional Wealth We Look for Exceptional Firms on Sale
Our investing philosophy is simple. We look for exceptional firms, and buy them when they’re on sale. Exxon has been pulled lower with the entire commodity sector. It’s the jewel on sale with the junk. And I literally mean junk. Many of the oil firms that have been the fastest growing have built their businesses using junk bonds.
Our risk aversion allows us to sleep at night. Exxon is a company that will never disturb your slumber.
Now, part of the reason Exxon has been hit so hard is that it has some exposure in Russia. (Exxon’s expertise allows it to drill in some of the harshest environments in the world.) And Russian investments are out of favor.
But that’s exactly when you want to increase your exposure.
Long-Term Energy Continues to Be an Outperformer
The modern-world economy is built on a foundation of inexpensive energy. And Exxon has been a leading innovator in the space.
While we may be in the midst of a pause in growth now, in the long term, we’re seeing development take hold – and higher living standards in the emerging economies require more energy.
Oil and natural gas are going to remain the largest part of that energy for most of our lifetimes.
Also, I expect that if oil prices get down around $70, we’ll see a huge number of wells shut down, and OPEC will get serious about putting a floor under prices. After all, when it costs more to produce than you get in cash, it doesn’t pay to keep producing.
Exxon Mobil will be able to continue to sail unscathed in these difficult waters.
That’s why we’re adding Exxon Mobil to the portfolio…
Action to Take: Buy Exxon Mobil (XOM) below $100.
Don’t be surprised if the shares trade to $150 in 2015.
Your eyes on the Hill,