Let me start by saying that there are no experts in the oil sector these days. What we have seen this year is a first-time-ever occurrence, so we are literally in uncharted waters. Therefore we must be humble with our opinions. However some companies like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) have strong fundamentals that have allowed for easy trading on the dips. This remains a fact and therein lies the opportunity to risk money on Exxon Mobil stock this year and beyond.
The bullish thesis on the stock has little to do with my outlook on oil. When the whole world is quarantined, I have no delusions about demand. We are not using the stuff, so for now, prices for oil should remain depressed except for headline spikes.
For the first time in over a decade, oil is actually trading on fundamentals. This is a reality that OPEC rhetoric cannot manipulate.
Exxon Mobil Stock is Better than the Rest
When the stock market corrected last month, oil also crashed. That sealed the fate of dozens of western oil companies. They are a leveraged bunch, and with revenues at a fraction of what they need to break even, servicing the debt became an immediate problem — to the point that survival is at stake. But not all all of them are created equal.
Exxon Mobil is one of two giants who are in control of their own destinies. In the last few weeks management vowed to protect their dividends by cutting back on expenses and so far they are following through.
The company leaders sounded very convincing about being comfortable with their cash position. So when the dips came on the flamboyant negative oil headlines, that was an opportunity to buy it for a trade. Given that valuations are reasonable with a 13x trailing price-to-earnings ratio and a price-to-book value under one, this is one trade that could actually turn into a long-term investment.
In the era where there is hardly any yield for fixed-income investors, the 8% that Exxon Mobil stock pays is as tasty as apple pie. The stock should be considered for balance portfolios, especially if they seek yield. The concept of TINA — There is no alternative — also extends to solid stocks like Exxon and Chevron not just for U.S. Bonds.
During Times of Trouble in the Oil Industry the Spoils Go to the Survivors
Even if the experts are right about the demise of many of the oil companies, then this would be good long-term news for those who survive. They would have less competition and the opportunity to buy up assets on the cheap. The same concept extends to Wall Street because the surviving stocks would have fewer investment alternatives competing for bids in the sector.
There is no doubt that Exxon Mobil stock is one of the winners, and so far buying the dips has yielded fast profits. This wasn’t difficult to see, as I recently shared the potential for upside just before a 20% rally. Some risks are easier to stomach than others, and this is as mild as they get.
Technical aspects of the chart lead me to believe that Wall Street will continue to buy the dips this year especially if one comes on the earnings headlines. In addition, if the bulls can overcome the recent fail points near $45 and $47.50 per share, they can start another $8 to $10 rally from there.
The World Still Needs Oil
The bad news stemming from the shenanigans of the oil futures contracts going to -$37 and the murkiness of the United States Oil Fund, LP (NYSEARCA:USO) have cast an unfair blanket of gambling on the oil companies. But this will abate — for example this morning Exxon stock is green even when the oil headline is negative. This is nothing new as the topic has been around for at least four years.
The fact remains that the world still is slave to using oil in spite of the headway that Tesla (NASDAQ:TSLA) has made in legitimizing the electric vehicle. We are still a long way away from not needing oil, especially when you count all the other fossil fuel necessities for power generation and industrial outputs.
The death of the combustible fuels is greatly exaggerated. Earlier this year there was a push into greener environmental, social and governance (ESG) investing. Large money managers endorsed it — like BlackRock (NYSE:BLK) which released a statement regarding its responsible standards going forward. You hardly hear of it now, so it remains to be seen if this concept regains momentum.
I am all for a greener earth, but one has to be realistic when allocating risk. For the foreseeable future, Exxon remains a winner and its stock is a buy on major dips.