Black Gold. Texas Tea. Oil. The single most important commodity in the world. Its importance is such that Exxon Mobil Corporation (NYSE:XOM) is one of the most important and secure investments in the stock market.
Control of oil resources is one of the primary reasons for human conflict in the last hundred years.
It is also an essential ingredient to human experience, hence the previous sentence. There is no end to what people will do to control the flow of oil and that will never change.
That’s exactly why you should have some sort of energy-related investment in your long-term diversified portfolio, and if you are going to choose any one stock, I not only suggest one of the Big Oil explorer/producers, but suggest you take a long look at Exxon Mobil stock.
There is simply no credible challenge to the statement that oil demand will only increase going forward. Think about it. How many countries in 1986, thirty years ago, could be considered developed? How about now? How about in the years to come?
The world continues to advance. Therefore, demand will increase. What better stock to own than Exxon Mobil stock, given these macro circumstances? This isn’t just cars and buses and planes that I refer to. Think about all the things in life that require some form of fossil fuel: Business, healthcare, electricity, housing, transporting any kind of goods anywhere. Developing nations will need more and more of this, because development takes decades, not months.
People complain about how awful oil is for the environment, but the fact is that there are no other forms of energy that are more efficient, save nuclear. Did you know that a gallon of gasoline produces more energy than 12,000 AA batteries?
There is so much to come from Exxon Mobil stock because, with Trump as President, you can bet he’ll drop sanctions against Russia. That means the 63 million acres that XOM agreed to develop with Russian oil concerns in Russia, will be opened up. That’s quadruple the amount of land available in the United States, and without environmental obstacles.
Historically, XOM stock has done very well. Since 1970, when Exxon Mobil stock was at $2 per share (split-adjusted), it has returned more than 42 times that investment. The five-year dividend-adjusted gain on Exxon Mobil stock is 51% … even with the oil crisis decline of the past two years.
With $40.6 billion in cash plus its long-term investments, and $32 billion in debt that generates about 1% of interest expense, Exxon Mobil is in a very enviable financial position.
We always look at cash flow for companies, but it is especially critical with XOM stock because it has tons of capex requirements. Sure enough, though, with a little over $19 billion in operating cash flow in the trailing twelve months (during tough times, I might add), and offset by about that much in capex, Exxon Mobil has decided to make certain it is investing in the future while still spending about $12 billion to pay its 3.5% yield.
As for valuation, it is not unreasonably priced at an EV-to-Ebitda ratio of 18, with peers trading both above and below that valuation.
The oil price crash seems to have abated and oil prices seem to have stabilized in the mid-$40 range. Because of its massive size, XOM is able to manage these shocks more easily than others.
Another telling sign was that investors did not panic when XOM saw its rating downgraded from AAA to AA+. That’s probably because of all the reasons I mentioned above. While I’m not crazy about management spending money on repurchasing stock, the evidence suggests that Exxon Mobil stock is a good play for the long term.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he 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.
