In a recent column, I wrote that, in my experience, people’s biggest bias is believing that the world will never change much. I believe that bias is the key reason why Exxon Mobil (NYSE:XOM) and other oil names are still trading at such low levels. But despite that sentiment, with the U.S. and European economies poised to reopen soon, now is a good time to buy Exxon Mobil stock.
Oil Demand Will Soar
Many investors think that oil demand will remain at its extremely low levels for a long time. Some may even still believe that oil prices can tumble to $10 per barrel, as some analysts have recently suggested. And if you have that mindset, it’s easy to see why they’re scared to commit money to even the biggest oil stocks.
“The current price environment in the $20s is not profitable for most U.S. oil-producing basins,” wrote Tom Seng, MBA director of the School of Energy Economics, Policy & Commerce and Mervyn Bovaird professor of Energy Business at the The University of Tulsa Collins College of Business, in an email to InvestorPlace. “We will see cut-backs in existing production and future drilling. That will not only impact oil & gas companies but also, the ‘service’ companies that support drilling and production.”
But the reality is that the world’s current situation is about to change a great deal. Those changes will cause demand for oil to jump tremendously, resulting in a surge of both oil prices and Exxon Mobil stock.
The World Is Starting to Open for Business
As I wrote in a previous column on Marathon Oil (NYSE:MRO), “around the world, some shutdowns have started to ease. In Europe, Austria, Denmark Norway, and the Czech Republic are among the nations planning to ease their lockdowns during the week of April 20.”
Meanwhile, Texas Governor Greg Abbott on April 13 said, “I think most states can reopen even sooner than later. We don’t have to wait until May 1.” May 1 is the date when the federal government’s warning will expire.
I think Abbott’s statement indicates that states led by Republican governors will open their economies quite soon, sparking a large increase in oil demand. As I mentioned earlier, such demand surges will be positive for Exxon Mobil stock.
There have been multiple indications that Democratic governors may try to avoid opening businesses in their states. But I think, aside from a few metropolitan areas that have had large coronavirus outbreaks, like New York City, Detroit, and New Orleans, Democratic governors will also soon have no choice but to reopen their states’ economies as well. That’s because two powerful catalysts will force their hands.
One major catalyst is lack of funds. If the Democratic governors refuse to open their economies when President Donald Trump’s administration recommends doing so, Congressional Republicans are unlikely to give those states the extra funds they will need to keep functioning without much tax revenue.
Secondly, if Republican-led states open their economies without causing thousands of deaths, the blue states’ unemployed citizens will begin to mount strong protests against their governors’ continued economic closures. Such protests have already begun in two states with Democratic governors: Michigan and North Carolina.
Given these catalysts, I believe that nearly all of America will be open for business in mid-May, lifting oil prices to around $40 per barrel and sparking a rally by Exxon Mobil stock.
Exxon Mobil Stock Has a Strong Balance Sheet
As another InvestorPlace columnist, Faisal Humayun, pointed out recently, “as of the end of last year, Exxon Mobil’s debt-to-capital ratio was 19.1% and it had a net debt-to-capital ratio of 18.1%.” Humayun also noted that the company had $3.1 billion of cash as of the end of December.
Given those ratios and the company’s large cash reserve, as well as the fact that Exxon Mobil has meaningfully cut its capital budget, the company won’t have to issue new shares of Exxon Mobil stock and it certainly won’t go bankrupt. In all likelihood, Exxon won’t even have to cut its dividend much, making its current 8%-plus yield extremely attractive.
With the U.S. and Europe poised to open their economies soon, Exxon is worth buying at its current levels.
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.
