Those who ask “is Big Oil dying,” have not examined Exxon-Mobil’s (NYSE: XOM) financial numbers lately. Importantly, Exxon-Mobil is making a lot of money despite all the rumors of Big Oil’s death.
For instance, Exxon-Mobil reports a gross profit of $27.276 billion on revenues of $71.895 billion for 4th Quarter 2018. Conversely, Exxon reports revenues of $290.217 billion and a gross profit of $101.377 billion for 2018.
Consequently, Exxon-Mobil reports a net income of $20.84 billion and an operating income of $31.719 billion for 4th Quarter 2019. Thus, Big Oil is alive and well and making a lot of money.
Big Oil is Making a Lot of Money at Exxon-Mobil
For instance, Exxon reports an operating cash flow of $8.607 billion and free cash flow of $2.513 billion for 4th Quarter 2018.
However, Exxon-Mobil has difficulty keeping all that money. For instance, Exxon-Mobil had $3.042 billion in the bank on December 31, 2018. However, the company records operating expenses of $69.658 billion for 2018. In addition, Exxon reports a cost of revenue of $188.835 billion.
Thus the oil business is both very expensive and very lucrative. Notably, Exxon-Mobil has a high operating cost in extracting energy. Consequently, this high cost could be the greatest threat to Exxon-Mobil.
To explain, the costs of extracting energy are so high, Exxon-Mobil struggles to make a few pennies on dollars. Therefore, a good case can be made that data-based companies like Alphabet (NASDAQ: GOOG) are better value investments than Exxon.
Is Data Really the Oil of the 21st Century?
“Those who own the data own the future” – Yuval Noah Harai. See 21 Lessons for the 21st Century Chapter Three for a detailed explanation of this theory.
Notably, many observers including Wired writer Joris Toonders proclaim “Data is the Oil of the New Economy.” Meanwhile, The Economist claims “the world’s most valuable resource is no longer oil, but data.”
To clarify, data is the fundamental resource our civilization needs to operate. Hence, data is to the 21st Century what petroleum was to the 20th Century.
Data is the New Oil or Is it?
Interestingly, financial data indicates that some of these claims are more accurate than many people think. Some of Alphabet’s (NASDAQ: GOOGL) numbers, in particular, do not prove “data is the new oil.” Yet, they show Alphabet is making a lot of money.
For instance, Alphabet’s 4th Quarter 2018 revenues of $39.28 billion are far lower than Exxon’s. However, Google’s 4th Quarter 2018 gross profit of $21.358 is high but still lower than Exxon’s $27.276 billion.
Moreover, Alphabet; the company formerly known as Google, records a gross profit of $77.270 billion for 2018. In addition, Alphabet records annual revenues of $136.8198 billion for 2018.
Does Big Data Make More money than Big Oil?
On the other hand, Alphabet is generating more cash than Exxon-Mobil. For example, Alphabet records an annual free cash flow of $19.4 billion for 2018.
Meanwhile Exxon reports a $16.44 billion annual free cash flow for 2018. Comparatively, Alphabet records a $30.72 billion annual operating cash flow for 2018. While Exxon-Mobile lists a $36.014 billion operating cash flow for the same year.
Hence, Exxon-Mobil runs more cash through its till but Alphabet keeps far more of its cash. Specifically, Alphabet had $109.14 billion cash and short-term investments on 31 December 2019. Conversely, Exxon-Mobil had $3.042 billion in cash and short-term investments on the same day.
Therefore, Alphabet is a far better moneymaker than Exxon-Mobil. Consequently, Alphabet shows data could be a better source of money than oil.
Is Data Better than Oil?
Alphabet makes money by harvesting vast amounts of data from a wide variety sources.
Those sources include the Google search engine, advertising, YouTube, Waymo self-driving vehicles, Google Express, Google Play, Android, and Google Earth to name a few. Alphabet monetizes the data through research and development, new products, advertising, and infrastructure construction.
In comparison, Exxon-Mobil makes its money from a couple of fossil fuels; oil and natural gas. However, Exxon-Mobil requires a complex process tor harvest those fuels. For instance, that process includes oil and gas exploration, drilling, infrastructure (pipelines and tankers), refining, and marketing. Thus, Exxon-Mobil needs to spend several dollars to make one dollar.
On the other hand, data is free or cheap to Alphabet. For example, Alphabet harvests data from advertises it sells. In addition, people pay to use Waymo One and buy apps from Google Play.
Thus, Alphabet pays little or nothing for a resource it can use over and over again. Thus, Alphabet pays little or nothing for a resource it can use over and over again. However, Exxon-Mobil pays to harvest resources it can only use once: oil or natural gas.
Is Alphabet’s Business Model Better than Exxon-Mobil’s
In contrast, Alphabet can make money from a piece of data like a search result dozens of times over. For example, the search results can be sold to advertisers, academics, researchers, manufacturers, bankers, governments, and financial analysts.
In addition, Alphabet’s researchers can use those search results to develop products and services. Then Alphabet can make money by selling those products and services.
For example, Waymo; the former Google Car, collects data about driving and car operations. Waymo uses that data to develop autonomous vehicle operating systems it can sell to automakers. Plus, Waymo can develop new services like the Waymo One ride share scheme.
Hence, Alphabet’s business model is better than Exxon-Mobil’s when you evaluate it for some value characteristics. However, Alphabet falls short on some value characteristics.
Are Exxon-Mobil (XOM) and Alphabet Value Investments?
Specifically, Mr. Market grossly overprices Alphabet at $1,253.76 a share on 22 April 2019.
I think that price is unwarranted because Alphabet pays no dividend. On the other hand, I believe Alphabet deserves a stock price of $400 or $500 because of all the cash it generates.
However, I believe Mr. Market correctly prices ExxonMobil Corporation (NYSE: XOM) at $81.13 on the same day. In particular, I think ExxonMobil’s shareprice is fair, because of the oil giant’s inability to keep cash.
Yet, Exxon-Mobil has a few attractive value characteristics. First, it is in an unpopular, controversial, and unfashionable business oil. Second, Exxon-Mobil manufactures something everybody uses petroleum products. Third, Exxon-Mobil pays a dividend.
Is Exxon-Mobil a good dividend stock?
Exxon-Mobil (NYSE: XOM) pays an impressive dividend. For instance, XOM owners received an 82₵ dividend on 11 March 2019.
Moreover, the Exxon dividend has been growing for 36 years according to Dividend.com. For example, the Exxon-Mobil dividend grew from 77₵ in March 2018 to 82₵ in June 2018. Plus Exxon shareholders enjoyed a dividend yield of 4.04%, an annualized payout of $3.28, and a payout ratio of 71.3% on 22 April 2019.
Consequently, Exxon-Mobil is a good dividend and income stock. However, the reality of Climate Change raises serious ethical concerns about oil companies. After all, there are credible allegations that Exxon knew about climate change for 40 years but hid the knowledge.
Is Exxon-Mobil an ethical company?
In particular, those allegations point to a high level of dishonesty by some Exxon-Mobil executives. However, Exxon-Mobil’s current management grasps the reality of climate change and is even lobbying for a carbon tax.
Conversely, there is a lot of self-serving cynicism in Exxon-Mobil’s carbon tax proposal. To clarify, Exxon-Mobil wants immunity from future climate change lawsuits for supporting the tax, Vox reveals. Note: this is a smart move for XOM investors because it protects Exxon’s profits from future litigation.
In addition, I think a carbon tax could grow Exxon-Mobil’s business by increasing the demand for oil and natural gas. To explain, a carbon tax is a levy on fossil fuels that will theoretically discourage their use.
However, governments will make more money from a carbon tax. Hence, a carbon tax will give governments a strong incentive to encourage or protect fossil-fuel burning. Consequently, a carbon tax could increase Exxon-Mobil’s market.
Is Alphabet an Ethical Company?
On the other hand, Big Data’s hands are far from clean on the climate change issue. To explain, they make Alphabet’s product; data ,from electricity. We generate most of that electricity by burning fossil fuels.
Notably, the United States generates 62.7% of its electricity with fossil fuels, The National Laboratory of Medicine estimates. Moreover, America makes 30.1% of its electricity with coal.
However, Alphabet claims it gets most of the data to run its Google Cloud from “sustainable sources,” server experts Paul Johnston & Annie Currie report. Unfortunately, Alphabet uses the clarification “offsets;” which means the Google Cloud switches to dirty electricity – if clean power is not available.
On the other hand, Big Data’s contribution to global warming is small. Johnston estimates data centers and cloud infrastructure account for just 2% of greenhouse gas emissions worldwide. Hence, Big Data plays a small role in global warming.
In the final analysis, both Exxon Mobil and Alphabet are good companies with serious ethical problems. However, I predict Alphabet will make far more money than Exxon-Mobil soon because I think data is the oil of the 21st Century.