Oil: Men will kill for it. Countries will declare war over it. Dictators will manipulate geopolitical crosscurrents to control it. Everyone else … guzzles it like cheap wine.
Oil isn’t going anywhere. Humans require it. It is wrapped into the human daily experience all across the globe. That’s why you must have some element of oil-related investment in your long-term diversified portfolio.
And if you’re limited to any one single stock, I’d suggest one of the big oil explorer/producers.
Why? Because these are behemoths with global presence and crackerjack operations. There’s really no bad choice in the group, but for this article, I’m going to cast my lot with ExxonMobil (XOM).
Why XOM Stock Is a Buy-and-Hold-Forever Investment
XOM stock has proven to be a fabulous winner. If you invested in Exxon in 1970, you got in at $1.80 per share, split-adjusted. Today XOM stock trades at $85.21, or a 47-fold return in 45 years. Even the five-year return on XOM stock is 53%, and that’s including the 20% drop during the oil price crash.
The future for oil is clear: Demand will increase. Back in 1990, developed nations consumed about half of the world’s energy, even though they only accounted for 20% of the world’s population. More and more nations are moving into the category of “developed”, which means demand for energy is going to increase.
I’m not just talking about gasoline for cars. Everything requires energy. Housing. Electricity. Businesses. Transporting goods. Healthcare. Think of all the developing nations that are going to require energy.
The other thing about oil is that it provides a whole lot of energy. A single gallon of gasoline produces as much energy as (ready?) 13,000 AA batteries.
I like XOM stock marginally more than its competitors because it basically combined the two biggest powerhouses in energy when Exxon Corp. and Mobil Corp. merged. While its technology and capabilities are roughly the same as its peers, it has a few advantages.
For starters, Exxon locked down this incredible deal with Russia. XOM has 63 million acres of land to explore, almost four times what it has here in the U.S., and without all those environmental restrictions. While sanctions prevent XOM from actually drilling there, eventually those sanctions will be lifted and the company can get moving.
With $40 billion in cash and long-term investments, offset by $25 billion in debt costing next to nothing, XOM is in great position. The company took on $9 billion in new debt last year to grab the new acreage and ramp up capex spending.
Yet we’re talking about XOM here, which also pumped out $12 billion in free cash flow last year, and does so on a regular basis. While almost all of that FCF is paid out as a dividend, the point is that XOM is a capital-efficient company.
Bottom Line for XOM Stock
On a valuation basis, it is more expensive than its peers by 15-20%. I use the EV-to-EBITDA ratio to evaluate this metric, but that kind of disparity isn’t all that bad, especially considering that XOM stock has fallen less than everyone else during this oil price crash.
When you examine XOM stock from a holistic standpoint, you see an incredible company with a great future ahead of it. I think you can buy here at $85 and hold for a very, very long time.
Lawrence Meyers does not own shares of any company mentioned.
