How does Obama's win help Exxon?
The carbon tax that has been floating around may now find legs quickly under Obama. Coal producers will suffer and natural gas may be the winner. So now we have strange bed fellows as big oil sides with Obama to bring in the carbon tax for one purpose and that is to increase their profits.
How does XOM profit? There is strong competition between coal and natural gas to generate electricity. It's really simple-if coal costs more, natural gas will look more appealing. Utilities will buy more NG and Exxon will make more money. Politically, Obama will look like a savior as he taxes the evil empires contributing to the global warming and at the same time raising billions more in taxes. Some believe the carbon tax will be a knockout blow for the thermal coal industry and a boon for the natural gas industry. Thus, a huge revenue benefit to Exxon.
Reasons for buying Celtic Exploration
XOM agreed to buy Canadian oil and natural-gas producer Celtic Exploration Ltd. for 2.59 billion Canadian dollars ($2.63 billion). The deal expands the U.S. oil company's North American shale-gas portfolio at a time when gas prices--and asset values--are suffering from a continent wide glut. Exxon continues to take a long-term perspective on natural gas, expecting it to be a fuel of choice globally in decades to come. Andrew Barry, President of Exxon Mobil Canada had this to say about the advantage the acquisition will bring to the company:
"This acquisition will add significant liquids-rich resources to our existing North American unconventional portfolio."
I am sure XOM had in mind the Carbon Tax strategy as this acquisition was taking place. The long term revenue strategy for investing in natural gas may arrive quicker than anticipated.
Even though Obama declared that a carbon tax was not high on his priority list, behind the scenes influential political players are whispering support. On the surface it may not be obvious that this is a tax being focused on but behind the scenes it makes sense that it is going to happen maybe sooner than later. It may be quick and quiet. A spokeswoman for Exxon Mobil recent said this when speaking to Bloomberg News:
"Combined with further advances in energy efficiency and new technologies spurred by market innovation, a well-designed carbon tax could play a significant role in addressing the challenge of rising emissions."
Who is going to argue that? XOM has given over $1 million in political contributions in the last two years and 93% of it has gone to Republicans. Isn't it interesting that Republicans are the ones who would be the most at odds with this tax. Exxon is the largest natural gas producer in the U.S. and as this tax gains ground here comes Exxon benefiting as power plants boost their demand for the gas. The writing is on the wall.
Exxon isn't the only company that may benefit greatly from the carbon tax. Anandarko Petroleum (APC) is among the largest independent oil and natural gas exploration and production companies in the world, with 2.4 billion barrels of oil equivalent of proven reserves clear back to 2010. Some of the larger well known oil companies like British Petroleum (BP), ConocoPhillips (COP), and Chevron (CVX) are among the top 10 natural gas producers in the United States.
Investing in EXXON Mobil
I honestly believe now would be a good time to build a long term position in the stock. From my observations, I think it is only a matter of time before the carbon tax is put in place and a big oil company like XOM will benefit greatly. A greatly increased revenue stream will be the results of this for Exxon. There is no reason for investors not to take advantage of this.
After resting (finding a bottom) in mid November, the stock has been on a journey up. Can this move last? It has pushed up through the middle Bollinger Band and I am curious to see if it will continue to move that way. The bands do have a bearish lean to them. The RSI indicator tends to follow the stock so there is nothing special there I can see that is revealed. This move up is as high as strong as the last one. The MACD looks like the stock will continue up a bit as we can see the beginning of a MACD crossover. As for a longer term move, I do not see anything that reveals a long term up now. The MACD crossover is all I can see as an extended move.
The Options Play
I like a long term investment in a long term option here to take advantage of the future carbon tax. I believe when it goes through, there will be an upsurge in stocks that have a long term investment in natural gas. The stock is trading at 89.09.
- Buy a January 2014 call with a strike of '95.00' (priced at $3.25)
- Net Debit to Start: $3.25
- Maximum Profit: unlimited
- Maximum Risk: net debit
- Maximum Length of Play: 14 months
Reasoning behind the Trade
While oil prices go up and down and so will the stock price, there will come a time when natural gas will exponentially grow with demand and Exxon Mobil will reap the profits. I believe the stock will surge when the Carbon tax goes through. At this point, the investment in the long term option will pay off handsomely.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.