In the oil patch there is such a thing as too much winning. When you have too much control over too much product, when the market is glutted, when you can’t get margins from refining or transporting it, that’s too much winning. I’m talking to you, Exxon Mobil Corporation (NYSE:XOM).
In 2015, we witnessed the decimation of Exxon Mobil stock, falling from over $90 a share to below $75, and it could describe 2017 as well.
That is not the way the market is betting. Based on the Dec. 9 opening price of $88.32, XOM stock is at a price-earnings multiple of 41, because the past few years have been horrid. Revenues from 2012 to 2015 fell from $451 billion to less than $260 billion, while net income plunged from almost $45 billion to barely $16 billion. For the first three quarters, revenue is just $160 billion.
Exxon Mobil stock is up because some analysts expect a turnaround. Estimates for fourth-quarter earnings range from 39 cents per share up to $1.11. It’s next year they’re waiting for, when the mean earnings estimate is $4.23 per share — meet that number and the P/E falls to about 20.
What if, as in 2015, there is too much winning?
Exxon Mobil Stock Reaches Peak Power
To read the newspapers, Exxon Mobil has reached the peak of political power. CEO Rex Tillerson is reportedly being considered for Secretary of State, where he would cozy up to Russia, America’s leading competitor for oil outside the Organization of Petroleum Exporting Countries (OPEC).
Courts have Exxon’s opponents on the run, and it’s environmentalists who are getting the subpoenas.
But while politics is looking good, economics is looking bad. The natural gas glut is global and Exxon is being moved to share facilities in New Guinea. The company has pulled out of three exploration blocks in Iraq. There is speculation that even OPEC can’t end the oil glut.
Power should be bringing Exxon control over supply, and better pricing for its products. But that’s not happening. The political effort to win such projects as the North Dakota pipeline will be wasted if it can’t be run profitably.
The recent Trump-fueled rally in oil prices could be a trap.
The Bear Case for Exxon Mobil Stock
At its present price, Exxon Mobil stock is a speculation. The balance sheet shows just $5 billion in cash, and while long-term debt is less than 10% of assets, that’s good only in comparison with the rest of the industry.
If cash flow does not improve dramatically over the next few quarters, and if profits don’t double as expected, getting above the 75 cent a share quarterly dividend rate, Exxon’s stock price could take a hard fall.
Right now, Europe has so much oil it doesn’t know where to store it. Meanwhile, China’s imports of oil are falling. Right now there is 1.1 billion barrels of oil sitting under the control of traders, waiting for an opportunity. That’s an overhang that is very bearish for prices.
Traditionally, an oil major like Exxon Mobil could make up for low crude prices by increasing margins on refining, so-called “crack spreads.” That has been happening. But now even those pipelines are full and the biggest export market is Mexico. You know, that country the president-elect wants to build a wall against?
Bottom Line on XOM
In the near term, over the next few months, I’d be more likely to short Exxon Mobil stock than buy it. I don’t short stocks, personally, and I don’t even like to recommend it, because as the old saying goes “he who sells what isn’t his’n must buy it back or go to pris’n.”
But that’s what the numbers are telling me, that Exxon Mobil is being held up right now by unreasonable speculation and could be in for a very hard 2017.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
