Why Exxon Will Keep Profiting as Oil Prices Slump

Includes: CVX, XOM
by: Rising Dividend Investing

Oil prices are trying to find a bottom along with stocks. Yet while the big international oil stocks are down, they have been doing much better than the overall market on a relative basis. Exxon (NYSE:XOM) is down about 11% over the past 12 months compared to the S&P 500, which is down almost 37%.

The relative strength in the oils might not make sense at first until you consider that they make money in three ways: Exploration and development, refining, and marketing. Therefore while oil prices are very low, it makes the oil companies' so-called downstream businesses, refining and marketing, more profitable.

Miles driven for the US and many world countries fell during most of 2008, as prices spiked to near $4.00 per gallon. This put pressure on the downstream portion of big oil's profits. So even though earnings for Exxon and Chevron (NYSE:CVX) were very good, they were held back by poor results in refining and marketing because drivers bought less gasoline.

For the next couple of years the situation will be reversed. Crude prices and profits will stay low, but refining and marketing profits will perform much better.

This Dividend Valuation Chart for Exxon shows that the price is buried deep into its value bar. This in itself is not unusual; most of the stocks we own and follow are selling well under their valuations based on the long-term relationship between dividends, interest rates, and price.

What makes Exxon stick out in these markets is its strong balance sheet, huge free cash flow, and it's long string of dividend hikes and share buybacks. All of these taken together make Exxon a particularly interesting stock in these very troubled times.

Disclosure: We own the stock and have for many years. Please do not make any investment decisions based on this information. Please consult your own investment advisor.