Exxon Mobil Corporation (NYSE:XOM) shareholders aren’t talking openly about getting a bump from retiring CEO and Secretary of State designate Rex Tillerson, but there is plenty of optimism built into the price, since Tillerson’s aims in the Donald Trump administration are consonant with Exxon’s own business goals.
There’s certainly precedent, though.
When Dick Cheney retired as CEO of Halliburton Company (NYSE:HAL) to become the Republican vice presidential candidate in the year 2000, he got a nice retirement package and his assets were placed in a blind trust.
After the election, Halliburton won a succession of contracts, many related to its Brown & Root subsidiary and the war in Iraq, which made that package look dirt cheap. During the Bush-Cheney years, the stock rose almost 180% to a 2008 peak. It even split. There was political blowback as controversy over the war rose, but the profits were good.
Peace in the Oilpatch
Simply put, Tillerson is hoping to bring some peace to the oilpatch, better relations with Russia and Middle East oil suppliers that can lead to consistent, profitable pricing for everyone involved in the production and refining of oil.
This would include U.S. shale oil producers, who have been whipsawed by West Texas Intermediate (WTI) prices that fell from a high of nearly $100 per barrel in mid-2014, all the way below $30, but have recently rebounded to slightly over $50.
For oil producers, the price of the product is less important than consistent pricing. This allows them to measure the costs and risks of drilling, take out production loans and pay them off. It’s something they had before the 1973 oil embargo with the Texas Railroad Commission, something they sought from OPEC.
For an international company like Exxon Mobil, consistent pricing means the price of product doesn’t change from well-head to refinery, and from refinery to pump. This cuts the cost of using options and arbitrage. It makes business life simpler.
A Peace Dividend
Oil peace would be good for everyone involved in oil.
It would be great for Russia, great for Saudi Arabia, and great for U.S. shale producers, which have been using technology during the oil bust to dramatically cut their break-even points. A few, like Pioneer Natural Resources (NYSE:PXD), are now running near break-even, and steady prices of around $60 per barrel would let drillers in the Permian and Eagle Ford plays return to pumping again.
For Exxon Mobil, steady prices of around $60 per barrel would reverse a worrying trend that has XOM stock woefully overpriced at $86.62, which is about where it opened on Jan. 6. At that price the stock has a price-to-earnings multiple of over 41, and its 3.4% yield is nice but isn’t screamingly attractive either amid rising interest rates.
Exxon Mobil’s debt load, one of the lowest in the oilpatch, has nevertheless risen steadily during the bust and cash flow has deteriorated, with only a modest recovery in the last two quarters as oil prices have recovered.
XOM, in short, needs a peace dividend, and such a dividend is now priced into the stock. Failure to find peace, in the form of another move down in prices, could impact the stock price severely.
Our Chris Tyler says you can “pay yourself smartly” with Exxon Mobil using a savvy options strategy, but that is predicated on OPEC going through with production cuts and oil prices remaining firm. In that case, XOM stock is indeed a good investment, able to make money on production, transportation, refining, marketing, and trading oil and its various fractions on a global scale.
But it all depends on stability. If Tillerson can deliver that, he will prove as important to his former employer as Cheney proved to his, only with a lot less political blowback.
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 did not hold a position in any of the aforementioned securities.
