Sometimes in the oil industry it seems that news comes out as fast as the price of gas changes. This is certainly the case with Exxon Mobil (XOM). Since the beginning of April, Exxon has hogged the news with announcements both large and small. By the looks of it, if they are willing to show some patience, investors will be happy with most of these announcements.
First and foremost, Exxon will be increasing the dividend it pays to shareholders dramatically. This is a reactive move, as shareholders have been complaining for quite some time about low dividends. As it stands, Exxon's current dividend payout is well below the industry average. Analysts estimate the dividend will increase by 10%, up to 33%. I expect Exxon's stock price and investor satisfaction to increase accordingly.
A boost in revenue should accompany the higher dividend payout. Exxon has been on a strong run with recent acquisitions and deals, and it is not done yet. One such deal is between Exxon and OAO Rosneft, a private Russian oil company. Rosneft estimates this deal with "give both companies access to 90 billion barrels of oil." But, that's not all. Exxon is among the first to tap into the enormous potential in Russian energy reserves. This offshore development is estimated to draw about $500 billion in investment.
Do not expect Exxon to have the whole pie, though. Eurasia Group, a consultant group, believes that this deal with open the door to more companies doing business in Russia. Even though Exxon will likely not gain any monopoly traction in the market, if it is able to effectively tap the reserves, you should see a nice increase in earnings on the way.
However, due to a new strategy, Exxon is becoming less reliant on new oil reserves. Since its oil wells have begun to age, Exxon has started acquiring firms in other energy sectors. Notably, it acquired XTO Energy in 2009, and is expected to close a deal with Chesapeake Energy (CHK) soon. Both of these companies are huge producers of natural gas.
Additionally, Exxon was recently barred from entering an Iraqi oil-and-gas licensing auction. Iraq did not allow Exxon to enter the auction due to a deal it had struck with the Kurdistan region. Iraq stated that Exxon would need to end its deals in Kurdistan to even be able to compete in this auction.
Aging oil wells and political situations, such as the one in Iraq, force Exxon into other markets. This is both a positive and a negative for investors. I expect that investors in the short term will see volatile stock prices as Exxon acquires its way to stability. If you are investing in the long term, Exxon is at the very least, a good bet.
One reason for short-term volatility is Exxon's entrance into the natural gas market. There are so many entrepreneurs involved in fracking that the market price of natural gas has plummeted. This is hurting Exxon, as it produces about 50% natural gas and 50% oil.
Analysts expect natural gas production to lower the profits of Exxon. In the first quarter, natural gas prices fell 40.5%. It's probably a good thing, then, that Exxon is increasing its dividend, as natural gas will not bring investors steady yields for some time. However, as people transition from oil to natural gas, Exxon will be in a position to dominate its current rivals ConocoPhillips (COP) and BP (BP), which have less exposure to natural gas and are more reliant on oil.
Do not expect these rivals to roll over though. Exxon will face stiff competition at the hands of ConocoPhillips, BP, and Chevron (CVX). Each competitor's stock comes with many red flags, although perhaps less of them than Exxon.
First, Chevron Corporation is expected to underperform, due in part to recent decisive moves. Opposite of Exxon, Chevron reduced natural gas production due to a drop in price. Again, as I mentioned, this might be a good short-term move, but I believe it lacks vision of the future of energy production. Instead, Chevron has doubled down on oil production, which has dropped significantly across the board. This is why Exxon has begun a less oil-reliant strategy.
Other competitor, BP, has a negative outlook similar to that of Chevron. BP has been unable to escape the Deepwater Horizon disaster. Much of this has been its own fault. Last week, a Department of Justice audit found that BP still owes $64 million in payments associated with the Deepwater Horizon spill. BP continues to make poor decisions regarding the spill. Its public image has been very poor since the spill and its stock price fell accordingly, after the announcement of this audit by the Department of Justice.
Looking to the future, I imagine ConocoPhillips will be Exxon's strongest competitor. It has a future-oriented approach similar to Exxon, as it is also a major natural gas producer. It is also constantly looking for new ventures, one of which is researching shale-oil deposits in South America. If these pan out for ConocoPhillips, they will be a long-term source of revenue. It also signed a deal with Oil and Natural Gas Corporation in New Delhi, India. This deal is yet another way for ConocoPhillips to capitalize on natural gas and shale-oil development.
The similarity between ConocoPhillips and Exxon should not be lost. Both are seeking out new ventures regarding energy as oil production slows and both are unafraid to use their vast cash reserves to strengthen their market position, even if it means short-term losses.
As far as viewing Exxon Mobil as an investment, you will need to consider the time frame. For a short-term investment, Exxon might not be the right stock. Even though its dividend is increasing, its stock price will likely fluctuate until oil production and natural gas prices stabilize. If you are looking for a long-term investment however, Exxon is a great choice. With an acute focus on the future and with its deep pockets, Exxon will continue to make strong acquisitions and deals. I expect Exxon to increase profitability in the long term, with its shareholders benefiting greatly.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.