I’m not changing my tune on Exxon, but my song is wavering. All signs seem to say go: At the end of July, 2nd quarter results were announced with net income for the second quarter a whopping $10.4 billion, a 23% increase from the first quarter. Company insiders aggressively bought back its stock last quarter, adding value to shareholders (though insider sales are now stepping up, with the stock price at a one year high). Growth is still strong, and the startup of a project off the coast of Nigeria is likely to keep it going. And let’s not forget Exxon’s stellar fundamentals.
Then there’s the recent development in Alaska, where Exxon’s competitor, BP, was struck a blow last week when it had to shut down its Alaskan oil field due to corroding and leaking pipes. Are BP’s woes good news for Exxon Mobil? Maybe for the short term: this time, it isn’t Exxon Valdez but BP pipes whose name is negatively splashed across the media. But it’s important to note: Exxon owns 36% of this oilfield too, too.
The Prudhoe Bay Alaskan oilfield accounts for 8% of daily U.S. production. So if the shutdown proves to be long term reality, look for Exxon to also suffer as a result. No question, the shutdown has already (and will continue to) cause a spike in oil prices, which will help offset any lowered production output by Exxon. But which is stronger -- the higher prices or the damage from the shutdown – is very much anyone’s guess. Given how much rising prices due to oil scarcity has helped Exxon in the past year, I tend to think the high prices will help more than hurt Exxon, particularly as only 2.6% of total U.S. oil supply (including imports) comes from Prudhoe.
So I still think this is a good pick, but one to approach with caution and good judgment.
Type of stock: A big cap commodity producer and industry leader in a field where oil is getting more and more scarce. Keep your ears on the status of the BP oil field in Alaska. If this is a long term shutdown, Mobil Exxon could be adversely affected -- though the rising cost of oil may offset the loss of output.
Price target: Since blogging about it on July 7th, when the stock was undervalued at $62, share prices have gone up and up. Just over a month later, XOM is now trading nearly at $70. While growth continues strong, I am feeling more cautious. Even without the BP oil field shutdown, I wonder how much more upside there is in this one. If you want a short term bump, you might pick it up now, but watch it carefully. If you are buying now for a short term boost, and the price starts to turn, I’d considering jumping out quickly.