You can’t go wrong owning energy for the long term. You just can’t. That’s because oil is a fundamental necessity of everyday human life. Oil touches and moves everything all over the world. Supply and demand may fluctuate, but oil is forever. To that end, owning any of the great legacy explorer/producers will serve you well over the long run.
Exxon Mobil Corporation (NYSE:XOM) is a terrific company that is well-positioned, but Exxon stock lagged some of its peers in 2017. Based on the fact that it is a terrific company, I believe its 7% decline last year should reverse, and investors will see the stock outperform going forward.
One thing Exxon stock has over its competitors is its robust downstream business, at least when oil prices are low. Downstream refers to refining crude and purifying natural gas, as well as marketing and distribution of products made from oil and gas. Downstream does better when oil prices are low because, as mentioned above, the products provided by oil, such as gasoline, are still needed.
Upstream, which is the actual exploration and production, does better when oil prices are higher. It means Exxon and its peers benefit because it is more profitable to extract oil and sell it. Upstream is more volatile than downstream because it is more directly linked to the price of oil.
The other problem with upstream is that because natural gas prices are lower and its offshore drilling operation endures really heavy costs, Exxon doesn’t get the same boost from higher prices as its peers. However, because oil prices are rising, it also means Exxon stock will benefit from extracting via shale again, which endures lower costs than other methods.
Exxon management experiences several crosscurrents which it is trying to mitigate by merging two divisions: ExxonMobil Refining and Supply Company and ExxonMobil Fuels, Lubricants & Specialties Marketing Company.
These will be merged into a new division known as ExxonMobil Fuels & Lubricants Company. The goal is to wring out inefficiencies in the downstream division and provide additional cash flow, to offset those more volatile upstream crosscurrent issues.
The good news is that oil prices broke out above $50, and that pushed upstream profits last quarter from $650 million to $1.6 billion.
More good news is coming for Exxon stock via the tax cut. XOM taxes should be cut almost in half. That means more cash flow, more profit and more flexibility in regards to spending capital.
What remains to be seen is when and if the United States will lift sanctions against Russia and permit the joint venture between XOM and Rosneft to move forward.
I figured it would take 18-24 months to happen so it didn’t seem blatantly obvious that the reason Rex Tillerson was named Secretary of State was for that specific purpose. However, with the nonsensical investigation into “collusion,” it could take even longer.
Bottom Line on Exxon Stock
For now, however, it is impressive for XOM to generate $240 billion in TTM revenues and generate some $13 billion in net income from it, and almost $15 billion in free cash flow. Almost all the free cash is used to pay the dividend, which is presently 3.55%.
There’s no long-term downside with Exxon stock.
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 23 years’ experience in the stock market, and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
