Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Can Exxon-Mobil still make money from oil?

It is not a good time to be an oil company. The pandemic caused the largest recorded decline in oil consumption in 2020, for example.

BP’s Statistical Review of World Energy 2021estimates global crude oil consumption fell by nine million barrels per day (BPD) to 88.5 billion BPD in 2020. However, United States oil consumption increased in 2020, The Oil Price claims. Thus, the largest oil consumer bought more oil in 2020.

Notably, America’s oil consumption of 17.2 million barrels per day still exceeds its oil production of 11.3 million barrels a day. Moreover, US oil production fell by 7.6% in 2020, The Oil Price estimates. Hence, demand for oil in the United States is rising while production is falling.

That could benefit Exxon-Mobil (XOM) America’s largest oil producer. US oil use is rising despite fears of climate change and the growing number of electric vehicles on the roads.

Is Exxon-Mobil Making Money?

The Exxon-Mobil Corporation (NYSE: XOM) makes money from oil, financial numbers show. For example, Exxon-Mobil reported quarterly revenues of $67.742 billion and a quarterly gross profit of $6.307 billion on 30 June 2021.

Additionally, Exxon-Mobil reported a quarterly operating income of $6.307 billion on 30 June 2021. That was first quarterly operating income reported after four months of quarterly operating losses. Notably, Exxon-Mobil reported a -$26.613 billion quarterly operating loss on 31 December 2020 and a -$1.64 billion operating loss on 30 June 2020.

In comparison, Exxon-Mobil reported quarterly revenues of $53.898 billion and a quarterly gross profit of $7.763 billion on 31 March 2020 at the beginning of the pandemic. Thus, Exxon-Mobil makes money from oil.

How Much Cash Does Exxon-Mobil generate?

Historically, value investors have loved Big Oil because it generates enormous amounts of cash. Exxon-Mobil’s financial numbers show Big Oil is still a cash cow.

For example, Exxon-Mobil (NYSE: XOM) reported a quarterly operating cash flow of $9.264 billion and a quarterly ending cash flow of $3.515 billion on 31 March 2021. The quarterly operating cash cash flow rose from $6.274 billion on 31 March 2020. Conversely, the quarterly ending cash flow fell from $11.412 billion on 31 March 2020.

Notably, Exxon-Mobil was paying off enormous amounts of debt over the past year. For example, Exxon-Mobil reported a quarterly financing cash flow of -$7.838 billion on 31 March 2021. The quarterly financing cash flow fell from $8.691 billion on 31 March 2020.

However, Exxon-Mobil’s debts grew in 2020. Exxon-Mobil’s total debt grew from $59.612 billion on 31 March 2020 to $63.322 billion on 31 March 2021. Predictably, Exxon-Mobil has less cash. Exxon-Mobil’s cash and short-term investments fell from $11.412 billion on 31 March 2020 to $3.515 billion on 31 March 2021.

What Value Does Exxon-Mobil have?

Thus, Exxon-Mobil (XOM) finished the first year of the pandemic with less cash and more debt. Yet, Mr. Market is paying more for XOM. For example, Mr. Market paid $42.25 for XOM on 3 August 2020 and $57.20 on 5 August 2021.

However, I think Mr. Market priced XOM fairly at $57.20. I think Mr. Market fairly priced XOM because of the cash it generates and the dividends it pays.

Notably, Exxon-Mobil will pay an 87₵ quarterly dividend on 10 September 2021. Overall, Exxon-Mobil shares offered a $3.48 Forward Annualized Dividend and a Dividend Yield of 5.98% on5 August 2021.

Hence, I consider Exxon-Mobil an excellent dividend stock because it pays a big dividend, and it is cheap. Thus, those who can handle the morality of owning an oil stock can make money from XOM.

What Future does Exxon-Mobil Have?

Exxon-Mobil’s future could be brighter than some people assume. For instance, Stockrow estimates Exxon-Mobil’s revenues grew by 7.73% in the quarter that end on 31 March 2021.

However, Stockrow estimates Stockrow’s revenues shrank by -31.49% in the quarter ending on 31 December 2020. Thus, oil is an unstable business and Exxon-Mobil’s margin of safety is low.

Yet some future circumstances look bright for Big Oil. Notably, oil prices are so high that the government of India is considering the sale of half of its strategic petroleum reserve, Reuters claims. Indian officials hope selling the reserve could stimulate private investment in oil production, which could push oil prices down.

The Chinese government is also considering selling 20 million barrels of crude from its strategic reserve, The Oil Price claims. Like their Indian counterparts, Chinese officials hope to increase oil production and drive prices down.

Are Oil Prices Rising?

Additionally, natural gas prices are rising in Europe and Asia because of a natural gas deficit, The Oil Price claims. Thus, demand for energy is rising as the supply is falling.

I think this situation could benefit Exxon-Mobil (XOM) by increasing demand and prices for oil and gas. However, there is no evidence the price increases and natural gas deficit are permanent.

Notably, oil production fell in all the Top 10 global oil producers in 2020, The Oil Price estimates. For example, production in the top oil producer (the USA) fell by 7.6% in 2020. Similarly, oil production fell by 7% in Saudi Arabia, and 8.9% in Russia.

I suspect oil prices could fall once US, Saudi, and Russian oil production returns to normal. The US, Russia, and Saudi Arabia are the world’s three biggest oil producers.

Exxon-Mobil Leaves Iraq

Thus, any recovery in big oil stocks could be a limited one. In addition, Exxon-Mobil could take a hit when leaves Iraq.

Exxon-Mobil wants to sell its 32.7% in Iraq’s giant West Qurna 1 oil field, Reuters reports. Exxon-Mobil was considering a $53 billion project to boost Iraqi oil production. That project has been abandoned probably because of Iraq’s instability and constant warfare.

Petorchina, CNOOC, and Paertamina, an Indonesian company, are poised to buy Exxon-Mobil’s stake in West Qurna 1. Interestingly, Iraq’s Prime Minister Mustafa al-Kadhimi wants another US oil company to replace Exxon-Mobil.

Translation: Mustafa al-Kadhimi thinks American troops will be more likely to stay in Iraq and protect him from his enemies if a US oil company stays. Conversely, neither the People’s Liberation Army nor Indonesia’s Army is likely to send troops to protect Mustafa al-Kadhimi and friends from their loyal citizens.

I think exiting Iraq is a smart move for Exxon-Mobil (XOM). Notably, it gets Exxon-Mobil’s employees and equipment out of a war zone. That sounds like rational management to me. Hence, pulling out of a $53 billion project is a good move for Exxon-Mobil.

If you are looking for a cheap and cash-rich dividend stock and you can live with the morality of big oil. Exxon-Mobil is worth a look. I think XOM will make money and pay dividends for years to come even as oil consumption shrinks.