When the history of this year is written, one of the headlines will be the fall of the house of oil.
In the last few months the bears have come out for Exxon. XOM stock is too rich, even with an 87 cent per share dividend paying 4.8%.
Think about what this means for Russia or Saudi Arabia. And think about what it means for western Canada, Alaska, Houston, and Dallas.
XOM’s Slowing Demand, Rising Supply
When I was still working in Houston 40 years ago, there were many stories about “peak oil,” the idea being we were running out of the resource and prices could skyrocket.
This has reversed. The International Energy Agency is repeatedly slashing growth forecasts, which have proven overoptimistic.
Three factors seem to be at work: Efficiency is cutting demand, electric vehicles are about to become a mass market, and GDP growth is slowing.
No, this isn’t about climate change, although the reality of it may be the most bearish signal of all. But renewable energy supplies are increasing quickly, as is battery storage. Oil bulls talk about the developing world, but those countries are moving toward renewables more quickly than the West. They talk about petrochemical demand, but some uses of plastic are already being banned.
Exxon Mobil Stock All-In
Exxon is all-in on increasing supplies, or at least the availability of supplies.
XOM bought Permian assets in 2017, and is rapidly increasing its Texas production. Exxon has also made over one dozen new discoveries off Guyana, over 5.5 billion new barrels that it will soon bring into production.
If oil were a good bet, Exxon’s diversification would make it the stock to own.
The company has extensive refining operations in which it is investing heavily. But its “downstream” earnings, as the company calls them, were negligible during the second quarter. Refining profits fell to $195 million from $1.66 billion a year ago, chemical profits falling to $706 million from $1.9 billion.
Overall Exxon earned $3.13 billion during the June quarter, 73 cents per share, on revenue of $69 billion. Revenue was nearly $4 billion more than expected, earnings 7 cents per share higher.
Oil prices were called “firm” during the quarter, as in firm but falling. The price of West Texas Intermediate (WTI), the prime U.S. grade, was as high as $65 per barrel in late April but was $55 per barrel in August.
The reaction to those earnings? XOM stock price rose just 80 cents per share. Shares that traded as high as $85 each last October were due to open Aug. 5 at $71.28. The shares now trade below where they were in April after what was called a disappointing quarter.
XOM stock price is falling as the Trump tax plan pours billions of dollars into the industry. What might the XOM stock do if those cuts are reversed?
The Bottom Line on XOM Stock
Exxon’s big bets on oil and gas aren’t paying off.
Dividend investors will be sorely tempted by that 4.8% return. But if you’re losing money on the stock your total return is negative. The shares are already trading just $3.50 above where they were during at the height of last December’s meltdown, and another wave of selling is expected over trade.
If you are desperate for that dividend, wait out the selling. Then, if you buy Exxon Mobile stock, watch results carefully.
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 email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.