Exxon Apostasy: A Closer Look at the Oil Giant's Real Valuation

A basic property of religion is that the believer takes a leap of faith; that is, believes without expecting proof. Often you find this characteristic of religion in other, more unexpected places–like the stock market.

It takes a while for a company to develop a “religious” following: Only a few high-quality, well-respected companies with long track records ever become worshipped by millions of investors. The stock has to make a lot of shareholders happy for a long period of time to form this psychological link.

The stories (which are often true) of relatives or friends buying a few hundred shares of the company and becoming millionaires have to percolate a while for a stock to become a religion. Little by little, the past success of the company turns into an absolute and eternal truth. Investor belief becomes set: The past success paints a clear picture of the future.

Gradually, investors turn from cautious shareholders into loud cheerleaders. Management is praised as visionary. The stock becomes a one-decision stock: buy. This euphoria is not created overnight. It takes a long time to build it, and a lot of healthy pessimists have to become converted into believers before a stock becomes a “religion.”

Religion stocks are held on faith. The traditional analysis is rarely applied, as it is perceived that these companies operate in a different gravitational field and that the laws that drive the valuations of the rest of the market are suspended when it comes to them. Take General Electric (GE). Until recently, it was perceived as an infallible, can-do-nothing-wrong corporate icon. Its shares were passed from generation to generation with a whisper: “Never sell GE.”

However, once the religious, unconditional, in-GE-we-trust veil was lifted, many found it to be just another complex, un-analyzable financial conglomerate that is suffering from addiction to the commercial paper market. There is nothing new I can really say about GE except that it represents what is wrong with religion stocks–it is bought (and actually in most cases held) on faith. Few attempted to value it beyond looking at reported ruler-like earnings that were played like a fiddle by management by manipulating pension plan assumptions and shifts in reserves in opaque GE finance.

Today’s discussion is not about GE but about another religion stock that is about to get its religious veil stripped. I have to warn you, it is another infallible corporate icon that can do nothing wrong: Exxon Mobil (XOM) –the biggest (nongovernment-owned) oil company in the world, the $400 billion market cap gorilla that brought wealth to generations of people.

What is wrong with Exxon? On the surface, very little. It has $25 billion of net cash (cash less debt); it grew revenues and earnings on per share basis at 16.5% and 25%, respectively, over the last five years; it pays a decent dividend of 2.1%; and the stock is a true bellwether, as it is down only 15% year-to-date, when the market is down at least double that. Here is the best part: It trades at only nine times estimated 2008 earnings of $8.75 per share.

Wait a second, this does sound like a perfect stock! This type of superficial, on the surface analysis is only granted to religious stocks. Their long-term track and an aura of reverence establish the leap of faith that eases us into drawing straight lines from the past into the future, and this is very dangerous.

Arguably, a similar “religious” attitude created by a consistent 12% a year, ruler-like performance and a blue chip pedigree (as a founder of Nasdaq) allowed Bernard Madoff to lower the guard of even very sophisticated investors and deprive them of billions.

If you were to take off the religious veil from Exxon and look under the surface, you’ll find quite a different story. The incredible double-digit revenue and earnings growth came completely from the big rise in oil and natural gas prices. XOM spent close to $90 billion finding new oil and natural gas, but oil reserves have not increased at all. Gas reserves are up 25% since 2003, but gas production increased very little.

I invite you to spend some time with XOM’s annual report. You’ll find that volumes of production and reserves in all its segments have not moved much since 2003. In many cases, they declined. So the magic behind all that growth over the last five years had little to do with XOM’s operating performance but was totally driven by commodity prices and share buybacks.

You might say that XOM is at only nine times earnings, and there’s not much growth built into the stock. Keep in mind, however, that XOM only trades at that valuation if it can earn what it earned in 2008 when oil prices were between $85 and $150. Unfortunately for XOM, fortunately for rest of us, oil prices are making five-year lows, revisiting the mid-30s.

My motto in life that I borrowed from Keynes is “I’d rather be vaguely right than precisely wrong.” Let’s figure what XOM’s vaguely right valuation is.

Exxon’s earnings overstate its true earnings power. To estimate XOM’s earning power at today’s prices, let’s look what it made when oil prices were in the 30s and 40s. In 2003 and 2004, when oil prices averaged $28 and $38, XOM made about $3 and $4 a share, respectively. Since XOM’s reserves are not growing, it is reasonable to expect no growth of production in the future. Don’t deceive yourself: XOM is just an operationally leveraged proxy for oil (and natural gas).

If oil stays where it is today XOM will not earn $8.75, as the Street expects it to earn in 2008. Its earnings will be around $3 or $4. It is trading at 20 to 25 times these earnings. This is a very high valuation for today’s environment, where companies with similarly strong balance sheets, with pricing power (XOM is a price taker), and whose cash flows are increasingly independent of what commodities are doing (non-cyclical) pay higher dividend yields and trade 10 or 12 times true earnings. Yes, there is a 50% downside in XOM’s stock.

My crystal ball on oil prices is as good as the next guy’s, but it is reasonable to expect that demand for oil will only be declining while the global economy is in a recession that only started in earnest a couple of months ago. Also, despite OPEC’s “production cuts,” the economies of its members are one-trick-ponies–they export petro chemicals and import everything else. As their oil revenues collapse, despite their threats, they cannot afford to produce less oil, and they have to keep building those golden palaces in the desert. So demand is declining, and supply may actually rise.

Let’s call today’s $30-$40 oil the seminormal case, though it could get worse. But what if oil prices go to $150? It is an unlikely scenario, at least while the global economy is in a recession, but in this case XOM has an upside of about 20%, as this summer it traded in the 90s when oil went to $147.

Exxon may be a great company. It made a lot of investors happy, but its success is in the past–it is simply too big to grow and it can barely find enough oil to replenish its reserves. Probably not in the very distant future its reserves will start declining–over 90% of oil reserves are owned by foreign governments, and they are not really looking forward to parting with them. Investors who own Exxon are gambling on oil and natural gas prices, and the odds are stacked against them: tails (high probability) you are down 50%, heads (low probability) you are up 20%. Even Vegas slot machines have better odds.

Emotions have no place in investing. Faith, love, hate and disgust should be left for other aspects of our life. More often than not, emotions guide us to do the opposite of what we need to do to be successful. Investors need to be agnostic toward “religion stocks.” The comfort and false sense of certainty that those stocks bring to the portfolio come at a huge cost: prolonged underperformance.

P.S. There are a couple additional but important caveats to XOM’s valuation: XOM bought almost a quarter of its shares since 2004, thus if XOM were to make the same income today as it did in 2004, it's EPS would be higher (net income divided by lower share count gives you higher EPS). Second, costs have increased substantially: the cost of finding new oil doubled from 2003 and getting oil out of the ground up 40% from 2003. These two factors cancel out each other.

Another point on valuation: XOM’s capital expenditures exceed its depreciation expense thus its free cash flows – a true determinate of company’s worth- are lower than net income by about 30%. For the simplicity of the analysis, I used P/E with unadjusted E, but you really need to adjust your E down to reflect lower free cash flows.

Comments

[eric0622:]

Try to run an engine without energy. Is population world wide on the decrease? Only foolish people believe XOM is not a good stock to have in their portfolio.

Jan 05 06:15 AM

[1977°C:]

Very interesting psychological look at the XOM but I must disagree with all for one very simple reason- XOM is a DJIA component ( about 7% weighting) and SP 500 component ( 5% weighting) which means that in any circumstances for the Crude Oil price this stock will have up to 2 times the average deviation from it's index ( XOM beta is 0.5%) that is XOM is able theoretically outperform DJIA or SP 500 by 50% on the downside and underperform 50% on the upside.
That is why exactly XOM is down only 15% not 35% as DJIA or SP 500 from it's high as it's beta is 0.5%.
Investors in XOM who think DJIA or SP 500 are going to be lower from year from now can stick to XOM, investors who are bullish may sell XOM and instead buy more correlated beta stocks to the upside with the value of beta 1 and above.

Jan 05 07:31 AM

[NOWHEREMAN:]

Cash and lots of it, enough to buy many ailing producers with No cash and good assets.

IMO

Jan 05 08:03 AM

[k45:]

Exxon didn't run out and pay inflated prices for new assets when oil was over $100/bbl. Management knew it was a bubble and didn't squander it's cash. Hopefully now that prices are down, it will be picking up some bargains.

Exxon has smart management. Smarter than most. That's the sort of company that I like investing in for the long haul.

Jan 05 08:23 AM

[john s. gordon:]

XON is still stiffing the people in alaska who had their livelihoods destroyed when the valdez went aground.
> jack

Jan 05 08:55 AM

[bindlepete:]

XOM seems to be shifting away from the oil businesses in 1- selling it's stations and 2-refineries and moving into the natural gas economy.

It has huge domestic reserves which are off the balance sheet and will use LNG - where it has a huge commitment - to establish a high marginal price for the less expensive to deliver, domestic resources.

Problem is that other have a lot of gas as well and this will remain in "glut" and undercut the LNG high marginal price without government interference or the bully boy tactics of the early Rockefellers.

If you hold XOM a strategy might be to sell high Options and skim the mystery price they now command.

Jan 05 09:12 AM

[xoman:]

This bright bulb forgot to mention that the reason GE stock got trashed was because GE did something that XOM did not - instead of staying with what GE does best, i.e. engineered products and services, GE greedily joined the other clowns and formed a finacial arm to cash in on the easy credit hysteria, a major cause of our present recession.

XOM kept its hands clean, stayed with the challenges at hand and now, through its integrity and operational prowess, has thrown possibly the only life preserver to the world through cheap energy prices to get out of this recession.

Integrity and honesty will always trash greed, something that gets taught to the world's population about every eighty years or so to sober it up.

Jan 05 09:28 AM

[k45:]

<<<XON is still stiffing the people in alaska who had their livelihoods destroyed when the valdez went aground.>>>

Exxon has worked hard to do anything reasonable to remediate the problem. Of course to some greedy people, nothing will ever be enough.

Do you realize that MOST of the Exxon Valdez problem was BP's fault? BP was contractually responsible for fast response and containment. They cut corners and failed in both areas: fast response and containment. If BP had done the job they were responsible for, the magnitude of the problem would have been tremendously smaller.

<<<XOM kept its hands clean, stayed with the challenges at hand and now, through its integrity and operational prowess, has thrown possibly the only life preserver to the world through cheap energy prices to get out of this recession.

Integrity and honesty will always trash greed, something that gets taught to the world's population about every eighty years or so to sober it up. >>>

I feel the same way. I hope we are right.

Jan 05 09:35 AM

[Edward, Lor...:]

Nobody has mentioned the ugly business of blood politics here.

The rabble has not lost it's taste for the blood of kings perceived, with merit or not, to be abusive.

Our Change Leadership, you will recall, last year announced to the rabble the name of the demon behind high gas prices and the resulting collapse of the auto industry Country and God: Big Oil. And the rabble cheered, took up arms, and marched on Versailles.

We're too limp-wristed, perhaps too toney these days to take Rex Tillerson out and chop off his head in the Place d'Revolution, er Concorde. But profits, horrible, evil profits, demon profits, windfall profits? We can at least strip the drapes, furniture and flatware from the palace.

Congress will give the rabble their due, Pelosi and Reid will pay to play. They need a Big Bag O' Bucks fast, and if they skewer the shareholders of Big Oil, oh my, they were aristocrats and had it coming. Screw 'em.

Think ye not? Read history.

Jan 05 10:19 AM

[scotty1560:]

agree with xoman's comments:

GE and GMC got away from what they do best, Exxon stayed the course
and didn't have the negative exposure of the other two.

As Nowhereman said:
Cash and lots of it, enough to buy many ailing producers with No cash and good assets.

Jan 05 10:42 AM

[Northoil:]

Agree w/gearhead. XOM is an integrated company. It doesn't just make money on the crude it owns (the reserves the author makes so much of), but also on the refining and retail marketing sides. Less than half the gas it sells is made from the crude it owns. When the price of crude goes down, yes, they make less profit on their equity crude but more on their refined products. You did notice, didn't you, that prices don't move down as fast as they went up?

XOM has made a 15% return since the world began. It's a great company and everyone should own it.

Jan 05 10:45 AM

[RIchard Glenn:]

Thanks for a well thought out argument. The comments above are exhibit "A" for religious attitudes toward some stocks. XOM is indeed a very well run company, but even a good company can be overpriced. And what do you think will happen to the price of oil once someone develops a battery capable of easily powering a car? My guess is $5 / bbl, as the only place it will be used is jetfuel and chemical feedstock.

Jan 05 12:09 PM

[jdb:]

...and who do you believe will be in the best position to supply the batteries?
Batteries need to be plugged in to be recharged. Who will supply the fuel to manufacture the charge?
When batteries become solar, congress will tax their use of the sun's rays to keep the price competitive with the falling price of oil.
Can you conceive of plastic houses, insulated not to need heating or cooling?
XOM isn't going to fly into Washington begging for bail out bucks for a long while.

Jan 05 12:54 PM

[BrotherMaynard:]

thanks for the original analysis. I couldn’t agree more that E&P’s in general are wildly overvalued at these energy prices. Credit suisse finally mentioned that (published via barrons):

“At $45 [per barrel] oil and $6 [per MMBtu] gas (2009 curve currently at $44.25 [per barrel] oil and $6.00 [per MMBtu] gas), the stocks are trading at a 37% premium to NAV, with the gas-focused names at a 43% premium and oil E&Ps at a 22% premium.

At $40 [per barrel] oil and $5.50 [MMBtu] gas (closer to current spot prices), the E&Ps are trading at a 65% premium-to-proved NAV with the gas names at a 75% premium versus 55% for the oilier names.”

One thing about your XOM 09 ests…i haven’t looked but XOM probably has quite a bit of its production locked up via hedges I’d be surprised if it was anything less than 75-80% 09 hedged and 50% ‘10 hedged. so i’d be skeptical that eps will show 50% variance.

(fyi...i posted this comment on your blog, too)

Jan 05 01:08 PM

[X Oil Man:]

Not XOM, but with big oil.
The analysis is right on target. None of the big oil companies spend sufficient capital on exploration: they prefer to keep that money to make $/share look better. The problem is left to the next generation - just like all our energy issues.
The 90% argument is smoke - just an excuse that cannot be verified. Smaller independent companies find new oil and increase production from existing fields. Somehow that success escapes the majors.
Someday, the lack of exploration will catch up and XOM will it will follow the path of GE. COP seems to be down the path already.

Jan 05 01:29 PM

[geojak0:]

hey Richard Marble ( a couple entries above) what do you think will fire the electricity plants to plug your car into? Water?

Exxon has some of the most admirable management in the world. All that cash and high stock price will allow them to buy reserves low. They've been stock piling their war chest for 10 years following the Mobil buy out. They're ready when they find the right juicy morsel to pounce on it, then watch that tiger take another elephant down. So no, many majors don't replace their reserves very well, but many smaller companies bet to big (Hess, Oxy,).

cheers,
Geojak

Jan 05 01:29 PM

[Osterix:]

Vitaliy: Your article has strengthened my resolve. I have been short XOM for some time. Sometimes I have doubts, but I think now I will hang in and see what happens in the next six months. If you are stupid for thinking XOM is a commodity play, then there are two of us because that is exactly how I see XOM. What I find fascinating about SA is the opinions in the comments are all over the map. No wonder market price movements are random and irrational.

Jan 05 01:36 PM

[Chris B:]

That's a good thought, but it assumes there are producers with good assets available for them to buy. I wish XOM good luck if they want to march into Russia, Saudi Arabia, Mexico, Venezuela, or Brazil with a suitcase full of cash and a bunch of Wall Street M&A suits. Those governments have no desire to sell their state-owned oil companies and their suspicious populations wouldn't let them anyway.

The big picture is that reserves in capitalist countries have been used up, leaving the world dependent on state-owned oil "companies".



On Jan 05 08:03 AM NOWHEREMAN wrote:

> Cash and lots of it, enough to buy many ailing producers with No
> cash and good assets.
>
> IMO

Jan 05 01:51 PM

[WayneS:]

> what do you think will happen to the price of oil once someone develops
> a battery capable of easily powering a car? My guess is $5 / bbl,
> as the only place it will be used is jetfuel and chemical feedstock.

ExxonMobil has already done this. They have developed a separator that will allow more powerful, lighter and longer lasting batteries in cars. No one has made any real money on gasoline, except the government and bank cards.

Jan 05 02:05 PM

[geojak0:]

Re Chris B: Very fair concern and so Venezuela, and Russia etal are not keen to let in the majors, but the pendelum does swing and if times are as tough as it seems and Russia is having difficulty replacing reserves, there is buying up COP, Talisman, Hess, big deals with China, Sub-salt Angola, Anadarko and BG with their subsalt exposure in Brazil. BG would be a good target for anyone with their Nile and Brazil assets.

Jan 05 02:34 PM

[searcher:]

Many of the same dog in the manger analysts trashing XOM for not joining the feeding frenzy in assets during the bubble will now decry their investment in same during these 'bad' times for oil & gas.

Jan 05 02:41 PM

[Ricard:]

The author wrote:

"and the stock is a true bellwether, as it is down only 15% year-to-date, when the market is down at least double that."

If XOM was really a bellwether, it would be down as much as the S&P, not half. In this case, XOM, WMT, and MCD are market out-performers, strange as that may sound. Even stranger is that CSCO and INTC have actually performed around the range of the S&P...are these two supposed to mirror the S&P now?

Anyway, just some semantics, good article. I've also been wondering why XOM is around the same price now as it was when oil was 4-5x more expensive. People predicting the return of the commodity boom would be well advised to look at real estate, and ask themselves if they see that returning any time soon.



Regarding the quote below, the author pointed out that XOM has $25bil cash. Does that justify a $400bil market cap? CSCO and INTC hold more cash than XOM proportionally. How many other oil companies are really that strapped for cash after they hit the mother lode the past couple of years?

On Jan 05 08:03 AM NOWHEREMAN wrote:

> Cash and lots of it, enough to buy many ailing producers with No
> cash and good assets.
>
> IMO

Jan 05 02:46 PM

[Socialism c...:]

Basic philosophical clarification on religion:

"A basic property of religion is that the believer takes a leap of faith; that is, believes without expecting proof."

Maybe just your wording is a little ambiguous, but it should be noted that a religious believer (at least of a *reasonable* religion), does *not* take a total leap of faith. Rather, although certain aspects of faith are not completely provable, they are not without any proof, nor are the tenets inherently illogical. The contrary belief that faith is illogical and has been proven so, is the downfall of many in modern science, who fail to recognize that faith and reason are *not* in conflict, but rather that they occupy adjoining realms. For a more extensive philosophical treatise on this topic, the encyclical "Fides et Ratio" of Pope John Paul II is the seminal work -- an excellent work of brilliant thought on the matter.

Jan 05 03:35 PM

[Socialism c...:]

Any comments on the other integrated oil majors? The core tenet of the article seems to be the reserve replacement ability of XOM. The other bigs may have the same issue?

Jan 05 03:37 PM

[Chuck Ashley:]

Your analysis sounds valid to me. When you see stocks like BAC, C, GE,
GM, F, AA, ETFC, and many other blue chips stocks lose much of their value, anything can happen. I own XOM and when it reaches my buy price I am selling it. You have guys like Boone Pickens, Edwin Black (Reference Edwin's new book, "The Plan",) and many others advocating natural gas, ethonal and battery power to propel out vehicles and I believe it will happen sooner than some think. Like Edwin said if Iran blocks the Strait of Homurs we will be in a bind world wide for oil.
Thank you Vitaliy for your appreciation of our free country.

Chuck A.

Jan 05 03:42 PM

[prudentinve...:]

I've owned both Exxon and Mobil shares for several decades, and have added to my holdings both before and after their merger, from time to time. With splits, I've built up a significant position over three decades.

Since 2003, whenever I've considered adding to my position, I've been deterred by the price, which, I thought, represented infatuation by the market participants rather than fundamental value. Thus, I agree with your apostasy.

Great company, but stock is overpriced, so I just hold onto my accumulated position as I am a buy-and-hold long term investor, not a trader. I have similar observations about several other big name companies of which the market has become enamoured.

Jan 05 03:53 PM

[auto44:]

Name calling and sarcasm is unnecessary and poorly done on your part. Your arrogant tone leaves your comment in doubt.


On Jan 05 09:28 AM xoman wrote:

> This bright bulb forgot to mention that the reason GE stock got trashed
> was because GE did something that XOM did not - instead of staying
> with what GE does best, i.e. engineered products and services, GE
> greedily joined the other clowns and formed a finacial arm to cash
> in on the easy credit hysteria, a major cause of our present recession.
>
>
> XOM kept its hands clean, stayed with the challenges at hand and
> now, through its integrity and operational prowess, has thrown possibly
> the only life preserver to the world through cheap energy prices
> to get out of this recession.
>
> Integrity and honesty will always trash greed, something that gets
> taught to the world's population about every eighty years or so to
> sober it up.

Jan 05 06:35 PM

[Michael Fit...:]

here's what you are missing wrt exxon:

1) they are integrated and have the best efficiencies in the industry, meaning they can profit whether oil prices are high or low

2) even though, as you mention, production was down year over year (but so was it at CVX, COP, and many other oil companies), they still produce 4 million barrels of oil a day. in an era where worldwide oil supply wont keep up with worldwide oil demand, that is a nice piece of the action to own.

3) the companies management is very conservative, which is why their financials are simply impeccable (my only beef is the industry lagging dividend yield which is pathetic).

4) long term, the price of oil is going to sky-rocket, and even if XOM's production declines, they are going to be printing money for decades.

you cannot evaluate exxon properly unless you understand the realities of worldwide oil supply/demand, which is that within the next 10 years, supply will not keep up with demand. take this year for instance, even with oil at $145/barrel worldwide supply never got over 86 million bpd. in other words, even today, with full on worldwide economic activity, the industry struggled mightily. with depletion rates running between 6-7%, what's it going to be like 2 years from now? 5? 10?? think about it. how can a person NOT own exxon mobil with this economic reality staring ya in the face?

Jan 05 07:25 PM

[DonaldRay:]

Your apostasy seems right on at first.....but as other has stated, plenty of cash for buy out of smaller companies which are begging for money injections in order to keep there head above water. Also, Exxon has done plenty of successful exploration, the problem is all the other countries are taking over the discoveries. Venezuela comes to mind. That is the problem with apostasy....it always seems right at first.

Jan 05 07:28 PM

[WayneS:]

DonaldRay - Nancy Polosi promises to nationalise the American oil companies, the same as Venezuela. And remember Oboma is a socialist, too. Also remember, ExxonMobil paid $16 billion more in corporate income taxes in the US than they made over the last 4 years.

Jan 05 09:06 PM

[.*.:]

Hard to argue. Revenue = price x volume. Extraction and refining costs have not gone down. With reserves constant, price must rise if revenue is to go up. If price does not rise, revenue cannot go up. Atr present XOM is stuck with a revenue linked to $45 oil. Earnings of $4/share sound about right. What am I missing?

Jan 05 09:17 PM

[.*.:]

Oh and one other thing. Yes they have a lot of cash. But unless you expect them to buy reserves at below market price for oil (possible, but not easy), then simply exchanging cash for reserves of equal value does not increase the value or earning power of the company.

Jan 05 09:20 PM

[mkreisel:]

My feeling says that this bear market will finally offer long term value investors a chance to buy XOM.

Jan 06 03:29 AM

[TxAggie96:]

On Jan 05 12:09 PM Richard Marble wrote:

> Thanks for a well thought out argument. The comments above are exhibit
> "A" for religious attitudes toward some stocks. XOM is indeed a very
> well run company, but even a good company can be overpriced. And
> what do you think will happen to the price of oil once someone develops
> a battery capable of easily powering a car? My guess is $5 / bbl,
> as the only place it will be used is jetfuel and chemical feedstock.

Trucks and Railroads will still need Diesel. People that drive long distances will still need gasoline engines. Airplanes will still need jet fuel. 40% - 50% of oil is made into products that are not fuel (chemicals, plastics, cleaners, etc). So at most in a theoretical world with current _forseeable_ technology, demand can only drop 20-25%.

And when everyone is driving around with their new battery powered cars it will be the same people griping about the conspiracy of the Nickel miners instead of XOM

Jan 06 09:13 PM

[Ricard:]

A well thought-out argument, but I think there's a fatal flaw.

No matter how highly integrated and efficient an oil company is, $140 oil is $140 oil. Integration means they do not lose out in any area of the supply chain, and efficiency means they can out-compete anyone. However, if the entire basis of their profits (high oil prices) collapses, it should follow that their stock should deflate as well. A highly integrated oil company profiting off of $40 oil better produce 3x product to profit as much as when oil was $140...and that has not been at all the case.

I'd explain your lack of supply increases by countering that oil execs have been waiting for this payday for 30 years, and knew not to get drunk off of it. Hence, they curtailed supply, delayed refinery projects, and waited for what they thought was inevitable...an end to the speculative boom. Rex Tillerson for one has almost explicitly stated this view in public interviews and annual reports.

As far as your future picture is concerned...who knows? You may be right...supply is on your side. However, we do have a Democratic President, Senate, and House. I suspect low oil prices for at least the next three years.


On Jan 05 07:25 PM Michael Fitzsimmons wrote:

> here's what you are missing wrt exxon:
>
> 1) they are integrated and have the best efficiencies in the industry,
> meaning they can profit whether oil prices are high or low
>
> 2) even though, as you mention, production was down year over year
> (but so was it at CVX, COP, and many other oil companies), they still
> produce 4 million barrels of oil a day. in an era where worldwide
> oil supply wont keep up with worldwide oil demand, that is a nice
> piece of the action to own.
>
> 3) the companies management is very conservative, which is why their
> financials are simply impeccable (my only beef is the industry lagging
> dividend yield which is pathetic).
>
> 4) long term, the price of oil is going to sky-rocket, and even if
> XOM's production declines, they are going to be printing money for
> decades.
>
> you cannot evaluate exxon properly unless you understand the realities
> of worldwide oil supply/demand, which is that within the next 10
> years, supply will not keep up with demand. take this year for instance,
> even with oil at $145/barrel worldwide supply never got over 86 million
> bpd. in other words, even today, with full on worldwide economic
> activity, the industry struggled mightily. with depletion rates running
> between 6-7%, what's it going to be like 2 years from now? 5? 10??
> think about it. how can a person NOT own exxon mobil with this economic
> reality staring ya in the face?

Jan 06 11:17 PM

[Gold Barron:]

I agree

Jan 10 09:21 PM

[Jake Berzon:]

I like the way Vitaliy thinks about XOM. Just because it is a large part of some indexes and has had a low beta in the past does not mean that this will continue. Look at how GE - it's also in the indexes and i's beta was low, yet when people realized what was going on at GE Capital - kaboom - share price dropped and beta shot up. If this recession proves to be a long one, and I think it will, XOM stock price will correct to a level where it will be better aligned with competitors.

Jan 18 01:47 AM