The world is facing an oil glut that could sink Exxon-Mobil (XOM) and its stock price. For example, Canada; the world’s 4th largest oil producer is pumping more crude than its pipelines can handle.
Canadian pipelines have a capacity of 3.95 billion barrels of oil a day but Canada is pumping 4.3 million barrels of crude a day, Oilprice.com reports. In fact, oil producers in Alberta are moving oil by train to bypass pipelines. Not surprisingly, the Canadian National Railway (NYSE: CN) is moving record amounts of petroleum.
Meanwhile, Canadian oil prices are so low many energy firms cannot pay their property taxes, The Toronto Globe & Mail reports. The energy companies cannot pay their taxes because their revenues are collapsing. Hence, Canada faces an oil glut.
The glut is so bad, Alberta will try to cut oil production by 325,000 barrels per day (BPD) or 8.7% on 1 January 2019, the Oil Price reveals. The Canadian oil glut could sink Exxon-Mobil (XOM) because Canada is just one oil producer.
The Death of OPEC could sink Exxon-Mobil (XOM)
Investors who expect OPEC to ride the rescue of Exxon Mobil (NYSE: XOM) are in for a rude awakening. The Organization of Petroleum Exporting Countries (OPEC) is dying fast.
For instance, four of the world’s five largest oil producers are not part of OPEC. For the record, the world’s top oil producers are the United States, Saudi Arabia, Russia, Canada, and China. Of those countries; only Saudi Arabia, the world’s second-largest oil producer, is an OPEC member.
To explain, the USA, Russia, China, and Canada are under no obligation to raise prices or cut production along with OPEC. Conversely, it is in the interest of these countries to keep oil prices low to drive the OPEC nations out of business.
Why American politics could sink Exxon-Mobil (XOM)
A related problem is that oil is a sideline for both the United States and China. Thus, political leaders in those countries have no incentive to raise or lower oil prices.
In fact, American and Canadian politicians have a powerful incentive to keep oil prices as low as possible. To explain, most American and Canadian voters drive, and benefit from low gasoline prices. Hence, politicians will try to keep them happy by keeping oil prices.
Additionally, the number of Americans working in oil and gas is tiny. For example, oil and gas rigs employed just 177 Americans in fall 2017, Market Mad House estimates.
That means the average American politician has no reason to care about the health of the U.S. oil and gas industry. Thus, the United States will not cut oil production like Alberta is trying to.
Oil Price Collapse could Sink Exxon-Mobil (XOM)
Under these circumstances, we face an oil price collapse that could sink Exxon-Mobil (XOM).
For instance, the per-barrel price of West Texas Intermediate (WTI) Crude fell from $53.25 on 4 December 2018 to $45.41 on New Year’s Eve 2018. To clarify, West Texas Intermediate (WTI) Crude, or Texas light sweet, a grade of oil that serves as a benchmark in pricing.
Importantly, WTI Crude was trading at $60.42 a barrel on 1 January 2018. Hence, WTI crude lost over one-third of its value in less than a year.
Surprise Exxon-Mobil’s (XOM) revenues are growing dramatically
Surprisingly, Exxon-Mobil’s revenues grew dramatically over the past year. For example, Exxon-Mobil reported revenues of $52.035 billion in 4th Quarter 2017 and $76.605 billion in 3rd Quarter 2018.
Exxon-Mobil’s revenues grew by $24.57 billion during the first three quarters of 2018. Interestingly, those revenues could keep growing for the foreseeable future. In fact, Stockrow calculates Exxon’s revenues grew at a rate of 25.38% during 3rd Quarter 2018.
Therefore, Exxon-Mobil’s revenues are growing as the oil price falls. Instead, of sinking Exxon-Mobil (XOM) a falling oil price is helping the company grow and make more money.
Exxon-Mobil (XOM) is making more money
Notably, Exxon-Mobil (XOM) is making more money as the oil price falls. For example, Exxon-Mobile reported a gross profit of $26.526 billion for 3rd Quarter 2018, up from $22.294 billion in 4th Quarter 2017.
Additionally, Exxon-Mobil records an operating income of $9.28 billion for 3rd Quarter 2018; up from $7.444 billion in 4th Quarter 2017. However, Exxon’s 3rd Quarter 2018 net income of $6.24 billion was down from $8.38 billion in 4th Quarter 2017.
Importantly, Exxon’s cash flow has exploded. For instance, Exxon-Mobil records an operating cash flow of $11.108 billion for 3rd Quarter 2018. That figure was up from $7.411 billion in 4th Quarter 2017.
In addition, Exxon-Mobile’s free cash flow rose from $2.910 billion in 4th Quarter 2017 to $5.904 billion in 3rd Quarter 2018. Hence, Exxon-Mobil has more cash to play with when many smaller oil producers are hurting.
Exxon-Mobil has more cash to play with
In fact, Exxon-Mobil reported $5.669 billion in cash and equivalents on 30 September 2018. That figure was up from $3.177 billion in cash and equivalents on 31 December 2017.
Moreover, Exxon-Mobil’s current assets grew from $47.134 billion in December 2017 to $53.795 billion in September 2018. Thus, Exxon-Mobil is in a position to issue large amounts of debt to finance expansion and acquisitions.
Under these circumstances, Exxon-Mobil is in a position to buy up many of the struggling smaller oil produces. In addition, Exxon-Mobil could buy assets like oilfields and wells from struggling producers in Canada.
For example, some Canadian energy producers could sell assets to Exxon-Mobil to get money to pay their property taxes. Thus, Exxon can expand its production as oil prices fall. Therefore, Exxon-Mobil could make more money as the price of oil sinks.
Exxon-Mobil (XOM) has more cash to pay dividends with
Shareholders will be happy because Exxon-Mobil (NYSE: XOM) has more money to pay dividends with.
For instance, Exxon-Mobil’s dividend grew from 77¢ on March 9, 2018, to 82¢ a share on 10 December 2018. Moreover, Exxon-Mobil’s dividend has been growing at a rate of 2¢ a year since 2014.
Interestingly, Exxon-Mobil was a great dividend stock before the price of oil fell. Notably, XOM shareholders enjoyed a dividend yield of 4.81%, an annualized payout of $3.28, and a payout ratio of 71.3% on 31 December 2018. In fact, Dividend.com reports Exxon-Mobil’s dividend has grown for 35 years since 1983.
Exxon-Mobil (XOM) is a Value Investment
Under these circumstances, Exxon-Mobil (XOM) is a value investment. In fact, I considered XOM underpriced at the $68.19 it was trading at on December 31, 2018.
If your conscience can live with the ethics of Big Oil, Exxon-Mobil could be a nice addition to your portfolio. I think Exxon-Mobil is in for several years of growth because the price of oil is sinking.