Falling, or rather plunging, natural gas prices have been hard on natural gas stocks and even big diversified energy stocks like Exxon Mobil Corporation (XOM) are feeling some of the pain, thanks to having exposure to natural gas. However, Exxon Mobil has remained resolute in its focus on natural gas for the long term, which begs the question: should investors be concerned about that?
Exxon Mobil and the Other Supermajors
To begin with, Exxon Mobil is the world's largest publicly traded international oil and natural gas producer. In fact and at the end of last year, it had a resource base of 87 billion oil-equivalent barrels - the largest among international oil companies. That makes Exxon Mobil one of the supermajors with the others considered to be BP (BP), Chevron (CVX), Royal Dutch Shell (RDS.A) and TOTAL (TOT) - and sometimes ConocoPhillips (COP). Together, these super large oil companies control roughly 6% of the world's oil supply, with OPEC and state-owned entities controlling much of the rest or around 88% of the world's oil.
Given its market cap and the fact that it is part of the Dow Jones Industrial Average, Exxon Mobil is easily one of the most widely held stocks out there, but its performance has not exactly been overly spectacular over the last few years. Specifically, and as of the beginning of September, Exxon Mobil is only up around 2% since the start of the year, up 20% over the past year, up 1% over the past five years, and up 145% over the past ten years, but the stock also has a forward dividend of $2.28 for a dividend yield of around 2.6% - which cannot be completely ignored in the current zero interest rate environment.
Is There Really a Problem With Exxon Mobil's Focus on Natural Gas?
One major reason some analysts have given for the stock's somewhat uninspiring performance is Exxon Mobil's conservative and long-term strategy, which is to be evenly diversified between oil and natural gas and to keep both upstream and downstream activities under one roof. That strategy means that at least for the short term, Exxon Mobil is exposed to record low natural gas prices. Moreover, and while other major oil companies have been cutting back on natural gas drilling, Exxon Mobil has actually increased natural gas production in the US - especially with its 2009 acquisition of pure play Fortune 500 natural gas producer XTO Energy.
So why is Exxon Mobil still resolutely focused on natural gas when others are cutting back? A quick look at Exxon Mobil's natural gas page on its website reveals that the company believes natural gas will be the fastest-growing major fuel to 2040 and that demand will be rising by more than 60%. The company further states that much of the growth in natural gas will come at the expense of coal as electric utilities and other major coal users try to reduce their CO2 emissions. In fact, Exxon Mobil believes that natural gas will overtake coal by 2025 to become the most popular fuel after oil with growth in every part of the world - especially in the Asia Pacific region where demand is expected to triple over the next 30 years.
Now much can be said of a company with a long-term strategy, but if your investment horizon is not as long as 2040 (let alone 2025), you might want to reconsider investing in Exxon Mobil. On the other hand, there are near-term factors that could boast the price of natural gas and hence the stock price of Exxon Mobil.
For starters, it's an election year and while the current administration along with their environmentalist supporters may have their sights on windmills, solar and other fanciful sources of energy that require expensive taxpayer subsidies, cheap and plentiful natural gas is getting too hard even for them to try and ignore. And should there be a change in who occupies the White House after the November elections, you can bet that government policy towards natural gas will change for the better.
Moreover, there appears to be enough natural gas out there that could turn the USA into a major natural gas exporter in the near future if the right infrastructure and more importantly, the right energy polices are put into place. At the very least, natural gas will increasingly power electric utilities and potentially vehicles as well.
Finally, it's worth remembering that the history of natural gas, oil and commodities in general has repeatedly shown their tendencies to collapse in price only to make sharp rebounds at some point in the future and that point can actually happen rather quickly. For example: Remember when the price of oil hit $145 a barrel in the summer of 2008 only to end the year at the $30 a barrel level? Oil is now trading at around $100 a barrel. That means we cannot expect natural gas prices to remain at record lows forever.
The Final Word: Exxon Mobil
If you believe that natural gas prices are in for a rebound in the short or medium term, clearly Exxon Mobil will benefit and you will come out as a winner. However, should natural gas prices continue to fall and remain low or flat, it's likely that Exxon Mobil's stock will continue to move sideways or at least give an uninspiring performance that could just as easily turn negative if oil prices were to fall as well.
On the other hand, I do believe that Exxon Mobil, given its sheer size and conservative management strategy, is a good addition to a portfolio of someone young with a long-term investing horizon who wants to play it safe. After all, natural gas prices will not stay low forever and if your investment time horizon is long enough, you will probably eventually see natural gas benefit Exxon Mobil's share price.