Market Mad House

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


Exxon’s Uncertain Future

Just three or four years ago questioning Exxon-Mobil’s (NYSE: XOM) ability to survive would have been a preposterous endeavor. Yet today asking whether the world’s most prominent oil company will be around in a decade seems like a legitimate line of reasoning.

The financial numbers in particular fuel these doubts, after all Exxon has lost $255.17 billion in revenue and $37.04 billion in income in the last four years. For the record Exxon reported $44.88 billion in net income in December 2012 and $7.84 billion in income just four years later. During the same period Exxon saw its revenues plummet from $481.26 billion to $226.09 billion.

Although Exxon’s revenues did actually grow during fourth quarter 2016. Revenues grew by $1.21 billion rising from $224.88 billion in September to 226.09 billion in December. That’s hardly a turnaround but it is the first quarter of revenue growth Exxon has experienced since June 2012.

Unfortunately that new revenue did not translate into income. Exxon’s net income fell by $1.1 billion during first quarter, dropping from $8.94 billion to $7.84 billion.

Exxon-Mobil is Making More Money

A few other figures at Exxon did increase, cash from operations rose by $3.01 billion. That figure went from $19.07 billion in September to $22.08 billion in December. Yet it is still a pale shadow of December 2012 when Exxon-Mobil reported $56.17 billion in cash from operations.

One figure that is greatly improved at Exxon-Mobil is free-cash flow which increased by $5.269 billion in 2016. Exxon reported a negative free cash flow figure of -$1.76 billion in December 2015 and a positive $3.509 billion in December 2016. Its free cash flow is actually higher than in December 2012 when it was $3.167 billion. Free cash flow actually increased by $1.558 billion during fourth quarter 2016 when it rose from $1.915 billion in September to $3.509 billion in December.

It is too early to say if this heralds a turnaround but it’s certainly a great improvement. Value investors should take notice because Exxon-Mobil is still a company with a lot of cash and float. It is in far better shape than Chevron (NYSE: CVX) which reported a free cash flow of -$146 million on December 31, 2016.

In the float department Exxon-Mobil had $330.31 billion in assets but just $3.657 billion in cash and short-term investments at the end of 2016. That should concern us because Exxon-Mobil had $9.582 billion in cash and short-term investments back in December 2012.

Is Exxon-Mobil’s Business Sustainable?

All this should prompt us to ask the question: is Exxon-Mobil’s business sustainable? Can any company even Exxon survive such massive losses in revenue and net income.

There is no good answer here because we have never seen a company take such losses and survive. Nor have we seen a company suffering such losses keep rewarding shareholders so generously.

Exxon shareholders received a dividend of 75¢ a share on February 8, 2017. That was up from 73¢ in 2015, 69¢ in 2014, 63¢ in 2013 and 57¢ in 2012. XOM’s dividend rose steadily for three years but not this year.

One has to wonder if we will see another dividend increase at Exxon-Mobil although investors did receive a 4.6% return on equity on December 31. So the stock is still pretty good and it seems a little underpriced at the $83.65 a share it was fetching on March 2, 2017.

Can Exxon-Mobil Survive the Oil Glut?

Despite those strengths there is one massive threat to Exxon-Mobil’s future it might not survive – the oil glut. The amount of black gold in the world is still far in excess of demand.

What’s truly scary for companies like Exxon-Mobil is that the glut seems to be increasing. One producer Libya wants to increase production to 1.1 million barrels per day (bpd) from the present 900 million by the end of 2017, that’s just 10 months away.

More bothersome is that 2017 might become the fourth year in a row that oil supply will exceed demand, the Oil Price reported. The world is simply pumping more oil than it can use.

To make matters worse production is increasing, the US oil rig count keeps rising according to Baker Hughes. Three new rigs were added during the week that ended on February 18. That brought the count to 602 which was up from 400 in February 2016, an increase of 202.

One has to wonder how anybody will be able to make any money out of oil with that growth rate. The US is now the world’s largest oil producer and it is increasing production.

Are Exxon Mobil and Saudi Arabia doomed?

An even greater menace is Saudi Arabia which is planning to convert Saudi Aramco into a publicly held company. That means big trouble for Exxon-Mobil because some experts think the Aramco IPO might not raise as much money as the Saudi’s want.

They projected it at $2 trillion, but Bloomberg Markets calculated the real value at $400 billion, or $1.6 trillion less. The Saudis were counting on Aramco’s IPO to generate enough money to revitalize their economy.

If the IPO will not raise the money, the Saudis will have to start pumping and dumping more oil possibly to pay the bills. That means more oil on the market as demand falls thanks to new technology like electric cars. That of course will mean lower profits for Exxon-Mobil and make the day when the oil giant stops dividends a likelihood.

Until that day comes though, Exxon-Mobil is a pretty good stock to own because of the dividends. Just be prepared to dump it fast because the days of revenue and net income losses at Exxon-Mobil are far from over thanks to the oil glut.