Exxon Mobil (NYSE:XOM) could stand to gain enormous revenues and profits from a major Middle East conflict, such as the one percolating with Iran and Israel right now.
The major players in this conflict would initially be Iran, Israel, and the USA (read this). Once the first strike begins, Iran has stated repeatedly that they will shut down oil supplies while "not harming Europe" very much (read this report). Of course, the rhetoric is ridiculous because the sanctions that are and will be imposed by a unilateral coalition (read this breaking news) will engage every nation that has anything to do with Iranian oil, much of which is imported by Europe.
Israel, in its own right, understands how this would cripple Iran, and also fully understands the global impact a first strike would have. The question is, can Israel take the risk of Iran having a nuclear weapon? Right now, Israel has an upper hand and has the ability to protect itself (read this breaking news report).
My personal opinions aside, a war (any major conflict) would be catastrophic globally in my view. Do you think that the Euro folly is a threat? Try a nuclear war event on for size. We would all have something much more than a few puny defaults to consider, dont'cha think?
While I hope that a diplomatic resolution comes about rather quickly, I can visualize a real war, unlike any since World War 2 (trust me I am NOT minimizing the devastating impact of any dreadful conflicts of the past 70 years), having the global impact that would make ALL other wars pale by comparison.
We should be positioned within our portfolio in the event that this issue is not resolved, and i believe that the only way to position ourselves is to be in the right stocks at the time. Exxon Mobil is the perfect choice in my opinion.
Exxon Mobil is the largest corporation on the globe. They are able to do virtually anything they want or need to. They have cash, they have brilliant people, they have facilities around the globe, and they are involved in the bloodstream of every life on the planet.
Exxon Mobil : Price: $84.92/share, Dividend Yield: 2.20%, ESS Rating: Bullish
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Recently they announced less than stellar earnings (read the report here) and the stock has dipped from about $87.00 down to around $83.00/share until the other day when tensions flared up with escalated saber rattling rhetoric from everywhere. It stands at about $85.00/share right now.
If a war was to break out, big oil would see the most immediate impact on their share prices. I believe the price of oil itself could top $150/barrel, which would eclipse the previous highs of the $140s. I also feel that with any extended war, oil prices could go into the stratosphere; unknown prices that could be laughable to even predict.
As Richard Russel pointed out in his article;
The asset class most affected would certainly be oil prices as the Middle East would become a war zone again. Surging oil prices might be temporarily viewed as bullish for equity markets, but would likely turn into a repeat of last year with surging prices ultimately causing recession fears.
I think it's irrational to make big bets on outlier events like this, but if the headlines deteriorate it would be wise to understand the market impact before the market begins to price everything in. And yes, while gold would certainly benefit, oil prices would be the primary beneficiary.
By the same token, XOM is positioned to benefit from the increased prices and there is actually no reference to even begin to conceptualize the price movement upwards in a catastrophic event.
Ironically, XOM's investment in Iraq (BP as well) will have a major impact on the profits made with an Iranian conflict. XOM has spent billions of dollars on the infrastructure there to enable the flow of oil to grow from 1 million barrels per day to 3 million barrels per day. The hope was to have that increased to 13 million barrels per day within a seven year time frame (read this recent article).
That would mean that Iraq would be the largest oil producer in the world, and a conflict of such a major scale would escalate those efforts. With XOM being the dominant player, they would reap the most from the oil already coming from there as well as the increased production at amazingly high prices.
An analysis recently done by researchers of "Wikinvest" had this to say;
Exxon Mobil leads a pack of six global "supermajor" petroleum companies which explore for, produce, refine, and market oil and gas. Of these six (including BP, ChevronTexaco (NYSE:CVX), Total (NYSE:TOT), ConocoPhillips (NYSE:COP), and Royal Dutch Shell), Exxon Mobil has consistently produced the highest revenue, income, and returns on capital employed (16.3% in 2009).
Keep in mind that the infrastructure has already been paid for at older prices, so anything new would be virtually all profit.
All of this being fact, where would the price of oil go? Obviously, we have no clear cut answer. There have been suggestions of $600/barrel and $10.00/gallon of gas in a worst case scenario. Some even suggest that the price of oil will be well over $200/barrel and gasoline would be $5.00/gallon by this summer no matter what.
Does $400.00/share seem insane? Yes, just as a nuclear war would be. A double or a triple of the share price from current levels does not seem that far of a stretch if the worst case scenario actually does occur, just as a drop back down to the low $70.00/share range is not unrealistic if all tensions were eased and the price of oil pulls back to the $70-$80/barrel range.
If the price of the stock is now selling at about $85.00/share and its profits were to triple, is it insanity to place a price tag of $275-$300.00/share on XOM? It looked like it as I typed this, but XOM did go over the $90s when oil hit $140/barrel 2 years ago.
Our irksome problem is that we just do not know what will happen of course, so advising one way or another would be a fool's game. The one thing I do know is that I want to own shares in big oil. I DO own shares of big oil, and will continue to own shares forever.
Exxon Mobil is the biggest and if you do not have shares of a big oil company in your portfolio, XOM would be the one I would buy.
XOM should profit the most of any big oil company, and its shares should reflect the increased revenue and enormous profits it stand to make. We often talk about reducing risks within our portfolio to smooth out the bumps in the road. Can you think of any other hedge that might reduce our risk of loss of portfolio value for the ultimate catastrophe?
I am not suggesting that we all go out and build fallout shelters or stock up on canned food and clean water supplies just yet, but I am giving my opinion on a stock to own that we MIGHT be able to profit with.
If the worst were ever to occur, we would have much more to contend with than our portfolios anyway.
Disclosure: I am long XOM.