Exxon Mobil (NYSE:XOM) Has been an energy stalwart for decades and Exxon stock has paid off pretty well, but the company’s continued success increasingly looks unlikely.
Almost 40 years ago I was convinced to leave Houston by an economist who had modeled how the local economy might do with rising, stable, or falling oil prices. In all three scenarios, Houston went into recession.
The early 1980s were indeed tough on Houston, but it came back stronger than ever. Houston today has about 2.3 million people. When I left in 1981 there were about 1.6 million.
Houston is still an oil town like Detroit is a car town. For years its center was the Exxon Building, built in 1963. Early in this decade the company moved to Irving, near Dallas the smell of oil, or an oil refinery, still smells like money to me.
The question is, for how long?
Falling Demand and Exxon Stock
Exxon, which dominates the U.S. shale oil market, gets a lot of the blame. There’s an assumption built into the IEA forecast, however, that shale will play out and demand will return.
Maybe they’re wrong. Electric cars are now displacing hundreds of thousands of barrels of demand each day. China is preparing for a boom in electric cars and is building charging infrastructure to meet demand. Buyers will have dozens of models to choose from next year.
Electricity demand is rising around the world but so is renewable energy production. That’s not counting the cheapest form of renewable energy, efficiency. LEDs take less energy to run than fluorescent bulbs. Putting intelligence into factories, stores and homes reduces demand.
Exxon Stock and Efficiencies
Efficiency has also hit the oil patch.
That’s why Exxon Mobil has remained profitable as prices have averaged $60 per barrel in the last half of this decade. Low oil prices have made Exxon stock a “dividend aristocrat,” its 87 cents per share dividend now yielding nearly 4.5%, backed by earnings of $4.88 per share last year.
Exxon hopes to drop the price of producing shale oil in its Permian Basin operations to as low as $15 per barrel. That may be below even Saudi Arabia’s costs. While the IEA still sees demand increasing about 1 million barrels per day in the future, Exxon is becoming the dominant player in a very slow-growth market.
What’s keeping oil prices up right now are international tensions. A war with Iran, which could block the Strait of Hormuz through which Saudi oil flows, might result in a hybrid war against tankers, pipelines, and other infrastructure. In this case, Exxon’s U.S. supplies will get top dollar from global buyers.
But what if peace breaks out? What happens when the war ends? Fundamentals will re-assert themselves. Between 1980 and 1986 oil prices fell by two-thirds, from a peak of $120 per barrel to an average of about $40.
The Bottom Line on Exxon Stock
Exxon Mobil’s best hope for profit in the near term is a protracted struggle over oil supplies, a threat of war that will keep China and other importers paying top dollar.
But the long-term supply-demand equation is running against Exxon. These are the good old days.
Exxon Mobil next reports earnings on Aug. 2, with 88 cents per share expected on revenue of $74.45 billion. That barely makes the dividend, even with cheap Texas crude and the prospect of still more from its recent Guyana finds.
War might be good in the short term, but peace looks like a struggle for the Kings of the Oilpatch. The 1980s may be coming back and, this time, they may not leave. Don’t believe me? Pick up some Exxon at about $77 per share and get back to me in five years.
Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.