Hot Features
Premium
Register for Free to get streaming real-time quotes, interactive charts, live options flow, and more.
I really did expect to write about something other than oil today, but you know what they say about the best laid plans of mice and men. The mere mention of ExxonMobil (NYSE:XOM) in my article yesterday led me to think a bit more about the issue, especially as XOM makes for a good example against which we can compare the sector in general. Exxon is, as you well know, the world’s largest, publicly-traded, international oil and gas company. Although its share price has suffered along with the rest of the industry’s over the past week, it has recovered to 94.28, which puts it back to slightly above its 50-day moving average of 94.09 and nearly at its median trading range for the past 12 months.
Good News from Exxon
Aside from the fact that some observers are rating XOM as an excellent investment at the moment and well into the future, CEO Rex Tillerson told CNBC that Exxon is positioned to remain profitable even if the price of Brent crude were to drop as low as $40 per barrel. Given that S&P analysts are projecting that the price of oil will bottom out at $75 and remain at or below $85 into 2017, things look pretty good as far as Exxon is concerned. (Those same analysts foresee West Texas Intermediate (WTI) remaining consistently $5.00 below Brent crude.)
Exxon is more than an oil giant. It is a well-run company that can, in Tillerson’s own words, withstand these kinds of price swings.”
If oil prices continue to stay below $90 per barrel, as S&P would suggest, energy investors are likely to move their funds to more stable and profitable companies like Exxon.
Bad News for Others
If the folks over at S&P are correct, it is reasonable to expect that some, if not many, other oil producers will suffer. It’s not because they are oil producers. It’s because their operations are limited and they are so highly leveraged. Many smaller producers are highly focused on exploration without a complete up and down stream available to them to maintain the balance of their business. All of their eggs are in one basket.
A primary characteristic of these companies is that they borrow to build, then borrow against their assets to build, then borrow against those assets to build again. As prices fall, their ability to repay their debt burdens will be impeded and they will find their credit ratings being adjusted downward and the supply of funds previously available to them exhausted.
Investors in these companies are probably already considering reallocating their investments.
Good News for Others?
If prices at the pump decrease (it is my opinion that they will not do so substantially), other sectors, such as transportation and retail, could benefit, as cost savings are passed through. However, with global economic conditions as they are, it’s not likely that a significant savings, if any, from transportation companies will be passed through. Or, if they are, that we will not see them reflected in the price of groceries and consumer goods.
OPEC’s decision is like a contest of plunging underwater to see who can hold his breath the longest. As countries go, it’s likely to come down to the U.S. and Saudi Arabia. As companies go, ExxonMobil is worth betting on to be a winner.
