After a pretty-respectable 2019 for Exxon Mobil (NYSE:XOM), things look pretty bleak for oil stocks in general and XOM stock in particular at this point.
The coronavirus is dampening travel by airplane and automobile, lowering demand for jet fuel and gasoline. Electric cars are making meaningful inroads in some markets. In the U.S., as InvestorPlace columnist Bret Kenwell pointed out recently, shale drillers are responding to any price increases by letting more of their oil onto the markets. Still, I think this could be a proverbial case of “darkest before dawn” for Exxon and its peers.
Among the reasons for my contrarian view are China’s commitment to purchase a great deal of oil and natural gas from the U.S.
Further, OPEC looks poised to lower oil supplies, and, as I’ve pointed out in the past, the relatively high oil prices at the beginning of the year may have given oil producers a chance to lock in those high prices. Additionally, Exxon will likely get the chance to sell much more natural gas overseas.
And despite recent fears about the coronavirus, of the world’s two largest economies and oil consumers, one looks to be largely unscathed by the illness, while the other is recovering from its coronavirus outbreak.
Rising Tailwinds for XOM Stock
As I’ve noted previously, the White House on Feb. 7 confirmed that Beijing would follow through on its commitment to buy, over two years, a huge $52.4 billion of “U.S. energy exports, primarily consisting of oil and gas.”
On Feb. 7, the coronavirus looked a lot more menacing to China’s future than it does now, so I think it’s a good bet that the country will follow through on its commitment. Also, as I’ve noted previously, Beijing has shown its good faith in this area by lowering its tariffs on U.S. energy exports.
Meanwhile, the OPEC nations and Russia could agree to further cut its oil production when OPEC representatives have their next scheduled meeting on Mar. 5-6. Bahrain’s oil minister said that cuts could be considered at that meeting, CNBC reported.
As I wrote in a previous column on Chesapeake Energy, ” oil production companies can lock in high oil prices for at least three years. ” So since West Texas Intermediate oil prices reached $64+ at the beginning of the year, there’s a good chance that Exxon will get that price for a meaningful amount of its oil until at least the end of the year.
Strong Natural Gas Demand
As I’ve pointed out previously, mostly in my columns about General Electric (NYSE:GE), demand for natural gas overseas is still growing rapidly. For example, between January and November 2019, natural gas consumption jumped 9% year-over-year in China.
As many developing countries switch large amounts of their electricity generation from coal to natural gas, demand for natural gas in such countries should surge.
ExxonMobil is already exploiting this trend, as the company is expected to sign a deal to provide natural gas to India’s IndianOil company and is already providing natural gas to the country’s largest natural gas supplier, Petronet.
Demand for natural gas could also increase in more developed countries. Those countries could continue to switch to natural gas from coal, while the spread of electric cars and data centers will increase demand for electricity. Exxon should further benefit from those trends.
The Bottom Line on XOM Stock
Lower oil prices currently bake in a big hit to oil demand from coronavirus, but the reality is that the U.S. is still mostly unscathed from the virus, while the World Health Organization recently reported that coronavirus peaked between Jan, 23 and Feb. 2. The U.S. and China are the world’s two largest consumers of oil by far, so worries about the impact of the virus on oil consumption could prove to be overdone.
Exxon’s forward price-earnings ratio of 14 isn’t very cheap, and the company is facing very real challenges. Still, I think that the positive catalysts I outlined above could take the shares from their current level of $54 back near the $73 level at which they were trading in September.
As of this writing, Larry Ramer did not own shares of any of the aforementioned companies. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
