President-Elect Donald Trump just named Rex Tillerson, CEO of ExxonMobil Corporation (NYSE:XOM) to the position of Secretary of State. The appointment has raised concerns from pundits on both sides of the aisle, given the apparent conflict of interest that exists. Yes, Tillerson will obviously resign, but his financial ties to XOM will still be there.
What does this mean for XOM, energy stocks, and America? The answers are all tied into one another.
First, it signals that President-Elect Donald Trump wants a dealmaker as his top diplomat. This makes perfect sense. Diplomacy is just about deal-making, and politics in general is, as well. Naming someone who has global business deal-making experience is probably a smart move, although it will obviously remain to be seen just how effective this strategy turns out to be.
There are many moving parts when it comes to geopolitics, and I’m no expert, but I think this also sends a very strong signal to Russia and Vladimir Putin. I think it tells Russian President Vladimir Putin that 1) the days of dealing with the weak and clueless Administration of Barack Obama and Hillary Clinton are over, but 2) there are deals to be struck that will be mutually beneficial.
Looking Forward for XOM Stock
Of course, the big play concerns the deal that Russia and XOM struck a few years back to explore for, and development, oil reserves in a massive portion of Russian real estate. Because of U.S. sanctions, XOM has been prohibited from kicking this joint venture off. Now, however, expect that hurdle to be whisked away.
Long-term that’s very bullish for XOM stock.
However, don’t expect this to happen overnight. The administration has to make it appear that it isn’t just lifting sanction and handing this cash cow to XOM stock. Instead, look for Rex Tillerson to meet with Putin’s counterpart early on, followed shortly thereafter by a meeting between Trump and Putin.
There will be a joint announcement in which our countries agree to cooperatively battle ISIS and other Islamic extremists. Tacitly this will likely include Israeli involvement, because Prime Minister Benjamin Netanyahu will want to make certain of Israel’s security. Ultimately, it is in Russia’s best interest to tackle Islamic terrorism, because it is a major threat in Chechnya and Dagestan. Islamic fundamentalists have declared war on all non-Muslims, and that includes Russia.
Russia will likely alter its aggressive imperialist push into Crimea and Ukraine, perhaps ceding back some territory or reducing its military presence in the regions because they want the oil in their backyard.
It’s not that Russia isn’t equipped for exploration, but it’s one thing to have infrastructure and equipment — it’s another if your partner is XOM. If you’ve read any of my articles, then you know that the world revolves around oil, and countries will do anything to control it.
Obviously, long-term, this is great for XOM stock. What about other energy stocks?
It’s tricky to assess because supply and demand, and thus oil prices, determine so much. It seems quite the coincidence that OPEC cut output, doesn’t it? Perhaps they are restricting supply now, knowing an XOM-Russia partnership will result in new supply, driving prices back down.
In addition, you can bet exploration will open up in the U.S. as well. That means oil service stocks and associated energy stocks should do very well as demand picks up. But oil prices will have to be modulated to keep them working, so it’ll be a juggling act.
Overall, however, it was probably a good move naming Rex Tillerson. This assumes one can set aside the principles of business conflict of interest.
The bottom line is that the world and American security depends on oil. If our chief diplomat is an oil guy, then one would hope this means more security for America.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
