Exxon Mobil (XOM) is the top integrated oil company in the world in terms of revenues and market capitalization. However, the major energy provider has lagged in the latest stock market rally. Though, the run is tiring for some stocks that I have recently proposed are extended and overvalued. As a result, I'm considering whether capital may shift out of recent runners into lagging ideas like XOM. There are some important considerations for us on both the long and short sides of the table about Exxon before we come to a conclusion. We will want to watch them after we take a position as well. In my view, the stock could trek a dynamic and multi-directional path over the short and long terms.
Exxon has hardly ridden along with the Dow Jones Industrials and the S&P 500 in this year's rally. The stock is only higher by 3.2% year-to-date, while the SPDR Dow Jones Industrial Average is up 11%. As a result, it might now become a destination of capital seeking to shift out of other high flying stocks and sectors.
The nascent market rally has come as a result of our survival of the fiscal cliff and debt ceiling concerns, with resulting capital shifts out of safe havens in money market funds and precious metals securities like the SPDR Gold Shares Trust (GLD). But the betting is also coming on long-term expectations for an economic recovery this year. I have concerns about the current economic situation though, outlined in my piece, "5 Economic Problems that Need Reconciling." There's even a chance that the market will reconsider the economic outlook as soon as this week, with revised forecasts coming from the OECD and the Federal Reserve. The Fed forecasts might include a downward adjustment for the sequester cuts, which was estimated by the Budget Office to impact the economy by 0.6% points. The Fed indicated that combined with other recent austerity-like measures, the economic drag could be as much as 1.5% points this year. Yet, it continues to see economic growth, though it may revise those forecasts lower as soon as Wednesday.
Such a change would impact energy prices and threaten the foothold of XOM over the short-term. Indeed, on Monday when the market fell back, so did XOM, which seems to evidence what may result over the short-term on a shift in economic outlook. Just the same, over the long-term, even the Fed agrees the economy should improve. So the secular driver for energy demand is positive, and so the long-term economic factor for XOM is a positive one.
Exxon's cyclical nature is apparent in its long-term chart's dips and blips. Though the company's beta coefficient of 0.86 (below 1.0) shows the long-term growth in demand for energy on global development and population growth, it also evidences Exxon's production growth and its ability to restore depleted reserves. This is the steadying factor in XOM's long-term progress.
Still, XOM also moves on changes to energy prices, especially those changes which are secular in nature and trend versus taking daily direction from oil prices. You can see that in the comparison of XOM with the iPath S&P GSCI Crude Oil TR Index ETN (OIL). Even though there's been some divergence in the long-term trend, there is a paralleling evident nonetheless between XOM and oil prices.
Energy prices are sensitive to geopolitical events, especially those which threaten supply. A confrontation of Iran could disrupt supply flowing through the Strait of Hormuz. If such a conflict were to last longer than is expected or if surprises were to occur, which are commonplace in war, then the shares of oil and gas integrated companies should rise, as long as significant assets are not directly threatened. In this regard, the global integrated companies are more vulnerable than domestic ideas like United States Oil (USO) or Chesapeake Energy (CHK), but they also have diversified benefits against such localized risk.
President Obama is visiting Israel this week for the first time during his tenure at the White House, and it comes just after his statement about Iran gaining nuclear weapon capability within a year. That fact alone should amplify market attention about the trip. It will alert the world to the possibility of a heightening in his or Israel's concern about Iran. As a result, I expect certain energy stocks will find some support. Exxon Mobil is certainly an idea that should benefit from any heightening of concern, along with peers Chevron (CVX), ConocoPhillips (COP) and BP (BP).
Valuation must always be a consideration in the investment decision. However, in this case, the fundamental factors behind the likely scenario would override valuation. You will want to consider the sensitivity of relative ideas to oil prices, and how individual assets might be impacted by any regional conflict. I provide a relative comparison table below. In summary, XOM seems to offer value in terms of P/E and Price-to-Sales and is within the range in terms of PEG, though it appears expensive in terms of Price-to-Book. Parties intimate with Exxon and friends can add value here as to the why and how on the specific valuation metrics.
In my view, the economic and geopolitical tides and winds will move all ships, though certain issues including oil price sensitivity and assets at risk in the Persian Gulf region will come into play on a stock-by-stock basis, and should be further explored and/or discussed hereunder in the comment section. Generally speaking, the economic outlook should weigh heavier than geopolitical chatter over the short-term, but with the long-term economic outlook positive and on the recent statement by the president about Iran, then we are presented with a dynamic forecast for Exxon Mobil . As a result, investors might avoid the stock over the near-term if adjustment to economic forecasts prove a factor in broader market reconsideration, and buy on weakness and upon a settling of the stock for long-term benefit on economic growth and the event-risk issue that seems to fit within the one-year time frame.