Why I Went Long Exxon Mobil on Monday

Monday I went long Exxon Mobil Corporation (XOM). I indicated in a prior article, I had no position. Since that article, I have traded Exxon Mobil long and short.

Exxon has performed poorly this year. On 2 January 2009, the stock was at 81.64, and Monday it closed at $66.55, down about 18.5%. Oil prices are about $67.22, which is a reasonable and healthy oil price for most integrated oil companies to perform well.

Please note that you can click through the above chart to see a full-sized chart and that the data for 17 August 2009 is not shown.

Of course, I am unsure whether Monday's market selloff is the beginning of a larger correction or simply random noise. I am less sanguine on the overall economy than most pundits and economists. However, with the Fed running its nuclear powered printing presses at full power, I am fearful of inflation and bullish on commodities. Time will tell if I jumped the gun Monday by getting long Exxon Mobil too early.

In this past weekend's lead story Quality Counts for Barron's (subscription might be required), Exxon Mobil is highlighted:

The oil giant is the industry's clear leader, with the highest returns, strongest balance sheet, best management and most stable earnings among the "super majors." Exxon shares normally command a sizable premium to those of such peers as Chevron (CVX), Royal Dutch Shell (RDS.A) and BP, but that gap has shrunk this year as Exxon shares have fallen 14%.

Exxon doesn't look cheap, trading for 18 times projected 2009 profits of about $4 a share. The stock, however, looks more reasonable based on 2010 earnings. The consensus calls for $6 in earnings next year, but one energy maven tells Barron's that profits could hit $7 merely if futures-market expectations for energy prices pan out. A forward P/E of 10 isn't bad for one of the world's best-run big companies.

I had been thinking about going long Exxon Mobil, and Monday's broad market selloff seemed to be a good opportunity to establish a long position. Should Exxon Mobil go down further, I might increase my long position.

Disclosure: I am net long with respect to Exxon Mobil Corporation. I am long shares, long puts, and short puts.

Comments

[epeon:]

I prefer BP because you can collect the dividend while you wait. Both good plays in oil and I think three years out you will be happy.

Aug 18 11:02 AM

[HunterGVL:]

I am also looking hard at XOM. I like them because of Peak Oil, a dollar hedge, and $40 Billion in PROFITS in a single year says they are executing well. I don't like BP for a very un-analytical reason. They are unlucky.
Three years from now, I know XOM will still be executing, and at the very least i expect to have preserved my capital no matter the global economic state. I expect that sometime in that same 3 year period, BP will experience one event or another that will hamstring them and their profits. BP is one of the few companies I like on simple analysis, but won't touch with a ten foot pole simply because of gut instinct that says they will not 'see it coming.' With a plethora of choices in this sector, that's enough for me to shy away from BP.

Aug 18 12:23 PM

[cranmer:]

BP = dividend

Aug 18 09:28 PM

[jimboy:]

Seeing as this has turned into a contest between BP and XOM I'll weigh in with my vote: BP. They have a good record replacing reserves and yields close on 7% (XOM 2.5%). They are very big on gas which I think is a good thing for the long term which is what I am looking for when it comes to oil holdings.

Aug 19 05:56 AM

[User 473563:]

does anyone have an opinion on Conoco Phillips.. I have gone long recently but it seems to be pretty dull reading about this company on the internet

Aug 19 07:57 AM

[Larry House:]

Kevin, I know we all want to buy at the absolute bottom, but you can hold XOM for years, so don't worry about the entry price. I bought MRO and XTO last Friday. One just has to have exposure to energy/oil, and there are many good choices to do it.

User 473563, I think (for what that is worth) COP is a fine holding. I don't own it right now, but I have, and I probably will again. The low price of natural gas is a drag on COP right now, but if the price of gas increases, as many expect, COP should reflect that nicely. Refining is not a bright spot right now, so that hurts COP a bit too. All in all, dividend taken into consideration too, I like COP; it is as good an integrated company as there is--in my opinion.

Aug 19 10:37 AM

[Eminencegrisse:]

XOM has a structural problem that conventional analysis largely ignores. Economically speaking, It's assets are depleting faster than it can replenish them. This is not the case with non-conventional producers.

Aug 19 10:37 AM

[Larry House:]

On the BP issue, dividend is only one part of the stock. BP management, at least in the past, has left something to be desired. I would rather own CVX, XOM, or COP before BP. I do own MRO, and I will probably add one of the first three as time goes on.

Aug 19 10:46 AM

[JPSmith:]

I'm avoiding U.S. oil companies, as I consider the current U.S. govt the most likely to punish "big oil" whenever it makes a decent profit.

I like BP, TOT and STO. They are also better hedges against the dollar than the U.S. companies.

Aug 19 03:44 PM

[thestock tr...:]

someone reads Barron's

Aug 19 05:46 PM

[Moon Kil Woong:]

It's probably best to see what happens to oil after the summer before playing oil or oil companies. Why buy now when fall always mean lower oil demand a nd usually lower oil prices? You might as well take advantage of the seasonality, people who play the commodities markets sure do.

Aug 20 04:19 AM

[KIT:]

OXY price did better than both xom and bp

Aug 20 05:44 AM

[Lamont B Du...:]

Was I absent one day? There seems to be a misconception here that BP pays a dividend & XOM does not. XOM has paid dividends steadily for a long time with consistent annual increases. They got beat up by "experts" for not bumping the dividend when oil spiked. XOM knew what the experts did not, the price spike was artificial. That's why they banked some of the extra cash and bought back shares with the rest. The buybacks return value without the need to drop the dividend when prices (inevitably) succumb to market forces.
As for BP's "bad luck", the great philosopher Lombardi said that "Luck is the residue of design". BP does not have the sort of processes in place that XOM has to look for little problems and fix them before they get big. XOM did a top-to-bottom revamp of how they look at everything they do in the wake of the Valdez. They basically took their exisiting financial discipline and applied it to every aspect of the business, safety, environmental and product quality. XOM (then XON) used the Valdez as a wake-up call. BP had a pipeline leak in Alaska, then hit the snooze button. Then they had the fatalities in Texas City. That may have gotten their attention, but they are 20 years behind XOM, even if it did.

Aug 20 09:17 AM

[HunterGVL:]

Exactly Lamont.....I mentioned 'Bad Luck' in my comment and you and another commentor took it a bit further. It is bad management, it is failure to prepare, and Texas City debacle was a sure indicator of the problems at BP. I also believe that you make your own luck, too, and BP is ensuring that in the future, theirs will be bad, again.

On the dividends, I agree with that too. Exxon has always been stingy with giving back, but long term (I know, I know...what does that mean in today's investing environment?? :-) ), they can be counted on to keep their value moving UP, and with the current uncertainties plagueing the investment community over valuations and balance sheet manipulation, you gotta go with Exxon for the long haul, exactly because, they think that way too.

Aug 20 10:03 AM

[larmanius:]

BP has been good for me...put position in around $40. But, people forget to mention, BP has stopped their green nonesense and decided to be a for-real oil company again! A huge change for the better!

Does XOM have any catalyst or are they at an optimal plateu such that their valuation as a boring but excellent producer is justified?


On Aug 18 11:02 AM epeon wrote:

> I prefer BP because you can collect the dividend while you wait.
> Both good plays in oil and I think three years out you will be happy.

Aug 20 01:15 PM

[Gary A:]

I am nervous about oil but more about the economy. Demand for oil dropped in China in July. Guess we can decouple from the phony Chinese rally, right?

Aug 20 06:58 PM

[Alan von Al...:]

Gary, I don't think it's a very good idea for retirees to play commodities. Oil is going to be taxed hard.

Aug 22 10:35 PM

[Texxon:]

Oil may be taxed but it will be the consumer who will pay it.

Nov 10 09:02 AM