The market hasn’t been kind to Exxon Mobil Corporation (NYSE:XOM) lately, as XOM stock is bouncing around a 52-week low near $75 per share. I find it immensely odd that the market rewards companies that experience nothing but annual losses with 11-digit valuations while punishing one of the world’s greatest companies.
But that’s the stock market. It makes no sense at times.
Energy stocks like XOM stock are something that every investor must have in their long-term diversified portfolio. The simple truth is that there are certain businesses whose product is so intrinsic to the human experience that, in the aggregate, they will always do well. Energy is one, because the world will always need oil. Everything runs on oil.
The world would literally turn into the Mad Max film series without oil. Everything gets shipped and transported on oil-driven transportation. Anything that needs to be manufactured by some kind of machine requires some form of energy. Many products are made from fossil fuels or their derivatives. If it’s made of plastic, it’s made from oil.
You can have just about any form of energy investment in your portfolio, but I’ve always leaned towards the big oil explorers and producers. Almost all are in solid financial shape, generate mammoth amounts of free cash flow, pay dividends, and have long histories.
Exxon Debt Downgrade
XOM stock has stumbled lately, after its debt was downgraded to AA+ from AAA. But that’s still better than its competitors.
The oil price collapse in 2014 is still hampering the sector. Yet XOM still delivered $3.4 billion in net income in its last quarter. Upstream earnings improved dramatically. Because Exxon Mobil is so massive, it has economies of scale that will permit it to maintain profits and cash flow at lower oil prices than other smaller competitors.
Certainly the other big development I expect in XOM stock is the eventual lifting of sanctions against Russia that will permit XOM to get moving in its JV with Rosneft. There are massive unexplored areas of Russia that this JV is supposed to exploit.
The financial picture remains strong. So far this year, XOM stock has generated a little more than $15.2 billion in operating cash flow and about $800 million in asset sales. It paid out $6.4 billion of this in dividends, dumped about $7.5 billion into capex, and paid about $1.75 billion in interest expense. Thus effectively everything is covered by operational cash flow.
The key element here is that XOM stock is paying its dividend, and easily so, with operational cash flow covering the dividend by about a 2.5-to-1 ratio.
For those who already own XOM stock, I would certainly hold onto it here. For current owners, or those who do not yet have a position, this is not a bad place at all to buy. The stock is just about sitting on its 5-year-low. That’s a great place to establish a position.
I would not sell Exxon stock at these prices.
As for traders, or those seeking other strategies, traders can certainly establish a position here, and I would set a 7% stop loss. If the stock falls below that 5-year low, it may fall further in the near-term and you would want to be stopped out.
Others may consider selling naked puts against the stock, opting to generate some income now, and should the stock fall below your contract stock price, you’ll have the stock put to you as a long position.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own 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.
