As the broader market questions whether the economy will hold up, the entire energy complex should face pressure. But does that necessarily mean we should sell Exxon Mobil (XOM) here? After all, the major oil & gas integrated company just hiked its dividend and has historically had less sensitivity to the economy than many of its energy complex peers. Just the same, I expect XOM could test last May's lows if a serious change in the economic outlook is adopted by the market as I expect, especially given the company's recent production falloff and revenue decline. With as much as a 12% stock price drop possible, in my view, I would sell XOM to preserve capital near-term.
In my daily analysis of economic data, I have noted a nascent trend of deterioration in domestic growth. The case against the economy had been hard to make while fighting a euphoric market driven by capital flows into equity funds. However, given the continuing onslaught of economic data deterioration globally, and in light of some corporate insight from cyclical companies like Caterpillar (CAT) and others, investors now seem to be reconsidering the cyclical energy complex as well. The most important player in the complex is arguably Exxon Mobil, and so we ask if investors should sell the integrated energy company here.
I already recommended investors sell the more volatile and economically sensitive equipment and services firm Schlumberger (SLB). So why would I hesitate at all with regard to Exxon Mobil? Well, there are key differences between the two firms that matter a whole lot with regard to this macro-driven investment theme. First of all, Exxon is so well integrated and embedded into the global economy that it's not going to move much here or there at the first signs of economic change. It's because it serves the ongoing needs of the global economy -- fueling it, so to speak. A Schlumberger or Halliburton (HAL) is going to be more dependent on new exploration efforts or upgrades to standing efforts that are supported by strong energy prices. When prices give way on economic softening, services & equipment and exploration & production businesses are impacted more than the integrated business of Exxon Mobil that keeps the world running.
You can see this sensitivity difference in the beta coefficients of Exxon Mobil and other energy companies. The major integrated companies are embedded in the economy and less dependent on new finds. As you can see, the beta coefficients of the major integrated firms reflect less cyclical sensitivity than the equipment & services firms and the exploration & production dependent independents.
Major Integrated Oil & Gas
Major Integrated Oil & Gas
Equipment & Services
Equipment & Services
Pioneer Natural Resources (PXD)
Independent Oil & Gas
Chesapeake Energy (CHK)
Independent Oil & Gas
Oil prices obviously still do matter a whole lot to Exxon Mobil and its major peers. Also, a beta of about 1.0 still does represent cyclical sensitivity. Even while XOM is less sensitive than the energy complex peers I have listed above, it is still sensitive. You can see this in the long-term price chart comparison of XOM to the S&P 500 Index. Also, given its production is falling off now, one might expect the stock's beta to rise moving forward as it intensifies its own E&P efforts. So, an economic downturn, especially one of global nature, does of course matter to Exxon Mobil, though less so than to the other firms listed here. I believe the impact is just later in coming and less important, versus the serious damage it can do in a hurry to those higher beta firms.
For that reason, the stock may lag and decline now behind its more sensitive sector peers during the economic strife I see inflicting us today. I know what you are thinking, that "strife" is a big word, perhaps an exaggeration. However, what I see happening in Europe is certainly definable by that term. The eurozone is in recession, and expected to stay there this year, especially now that Germany and France are sinking deeper into the mess made by their Southern partners. Also, Chinese output data was recently softer, which reflects lighter demand for goods from sickly Europe and maybe even the U.S.
In America, I think it's becoming clear now that the economy is a lot less sanguine than the capital flooded stock market would have us believe. The market has concealed our ugly warts, like the fact that our real unemployment rate is much more significant than is being reported by the government. As a result, I believe our economy is vulnerable to economic issue and could fall into recession more easily than in past history.
GDP was just reported Friday running slower than economists had expected, up 2.5% in Q2, versus the consensus view for 3.1% growth. This followed the pathetic growth of 0.4% in the fourth quarter of 2012. The first quarter was expected to show a bounce back in business activity, as business that was probably held back in Q4 because of the paralyzing effect of fiscal cliff fear was freed up after the turn of the year. However, the expiration of the payroll tax break and the Sequester spending cuts seem to be inflicting some significant pain, especially in the consumer mood.
Exxon Mobil just reported its first quarter results Thursday, and its EPS of $2.12 exceeded the analysts' consensus expectation for $2.05. Still, the stock slipped on the day because of a seventh straight quarterly decline in the company's oil and gas production against prior year results. Exxon is investing heavily, though, to fix the problem, and in its recent release, spoke about its Arctic and Alaska efforts. Still, revenues fell by 12%. Much of the company's production decline was due to natural atrophy of reserves' off peak production. Take note, though, that oil prices were $8.66 lower per barrel on average in Q1, because a significant portion of that is attributable to the global economic situation. The company's saving grace was that its chemical profits benefited from lower natural gas pricing in the U.S. versus overseas, giving it a significant cost advantage.
Over the long term, a variety of issues will factor into XOM's price and valuation, including how effective it is at rectifying its production downtrend. Iran could very likely matter as well over the next year or two. But what I'm concerned about here is the near term, because I believe we are at an inflection point, where a change in the popular economic perspective could impact the energy complex negatively. Despite this company's lesser sensitivity to a slowing global economy, it is sensitive and should see negative impact.
Exxon Mobil's dividend yield is secure, and the company just raised it as well, so the new yield is about 2.87%. It adds a margin of safety to XOM returns that helps offset issues over the long term. However, over the near term, if the economy slips as I expect, XOM could slide just like it did last May, when it fell to about $77.60. That is $10 less than the current stock price, and considering revenues are declining, I would not put it out of reach for this year, either. Such a slide would mean a 12% hit to invested capital, and so the 3% yield is not enough to keep me favoring the stock near term. For nimble portfolios with other options, even those that must maintain energy exposure, I would sell Exxon Mobil to preserve capital.