Exxon: The Safety Stock For Oil Price Drops

| About: Exxon Mobil (XOM)
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A discussion of Exxon Mobil (NYSE:XOM) is full of superlatives. It is the world's largest oil & gas company. It is the largest natural gas producer in the North America. With a capacity of 5.8 million barrels a day, it is the largest oil refiner in the world, followed distantly by Shell (NYSE:RDS.A). As a chemical company, it has the highest return on capital among its peers. It has more oil reserves than any non-national oil company except for the Russian giants Gazprom and Rosneft, which, though they are exchange traded, are nevertheless state-controlled. The top five all-time annual earnings for a corporation are all from Exxon, with the best year coming in 2008, as oil prices skyrocketed and the world's economies plunged.

Exxon makes most of its money on oil and gas production, but its position as an oil refiner, chemical producer and marketer of refined products gives it some protection when oil and gas prices are falling. The company has refinery capacity in the North America, Europe, Asia and the Middle East. Its chemical complexes are similarly distributed.

Is Exxon a good investment? Part of the answer depends on what happens to the price of oil. At the beginning of the year, it looked like 2012 might be a replay of 2008, when West Texas Intermediate (NYSE:WTI) spiked above $140 per barrel, and gas prices were $4 or more per gallon. WTI did manage to trade above $110 and some were predicting $5 per gallon gas prices over the summer, but it did not happen. A slowdown in China and turmoil in Europe has sent crude plunging, to about $82 per barrel currently. Natural gas prices, meanwhile, are near decade lows.

Exxon's stock price has not suffered much from the drop in oil. The increase in the dividend rate in May probably helped the stock escape some of the fallout. Other large oil companies, like Shell and BP (NYSE:BP) have suffered much more. Natural gas companies, like Dominion Resources (NYSE:D) and Sempra (NYSE:SRE) have actually done better, helped by reports of deals with the Japanese, who are importing gas to relieve the energy shortages caused by shutting down their nuclear reactors.

As the world's population increases, as economies emerge, surely the price of oil must increase, since it is a finite commodity. But though much has been made of Peak Oil, the fact is that oil production has steadily increased over the last thirty years. Though perhaps all the very large fields have been discovered already, oil companies have gone to more extreme locales, to deeper depths, and have also used advanced technology to squeeze more oil out of the fields already plundered.

Exxon recently signed a joint development deal with Rosneft that will give Exxon access to areas in the Kara Sea, north of Siberia and also to areas in the Black Sea. Rosneft, in turn, will participate in shale projects in North America, as the Russians are interested in learning that technology for use in Western Siberia. In another deal, signed June 18th, Exxon and Rosneft will collaborate on several 'tight oil' fields in Western Siberia. Tight oil is light crude contained in low porosity formations, frequently shale.

Exxon owns 35% of new natural gas find containing an estimated 3 trillion cubic feet of gas in offshore Tanzania, which it is developing with Norway's StatOil (NYSE:STO). The two firms have another 6 trillion cubic feet in an adjoining block.

Exxon, through its majority interest in Imperial Oil (NYSEMKT:IMO), is also involved in a partnership called Syncrude, to use open pit mining techniques to recover oil from Canadian tar sands. This is an environmental disaster occurring in an otherwise pristine wilderness and probably would not be allowed in the United States, but Canada realizes that its economy is based on resources.

The trouble with using advanced technology is that it is usually expensive. Tar sands production used to cost about $70 per barrel, which made it uneconomic, but costs of production have been going down with experience, to about $50 currently, according to Shell Oil.

Exxon is expected to earn $8.61 per share this year and $8.81 next year, only a small increase, but of course it critically depends upon the price of oil, which has been anything but stable the last few years.

In my opinion, the bull case for investing in Exxon as an individual is that it is a kind of call, or insurance, on the possibility of oil spiking up again, especially if the peak oil argument is correct, and production really does start to fall off. Exxon has more reserves than any other private company, and has them very diversified. Offshore, onshore, deep wells, shale oil, tar sands, North America, Middle East, Russia, Africa, you name it. If the price of oil goes up, Exxon is sure to benefit. If the price of oil stays the same, or drops, Exxon can still make money, and it pays a pretty good dividend, with a yield of 2.83%. Thus it is much safer than say, a company like Kodiak (NYSE:KOG), which is essentially a pure play on Williston shale in North Dakota, which may be uneconomic to produce if the price of oil does not rebound.

So, if the pump price of gas does go up and up, you can remain confident that your Exxon dividends will keep pace. The company has consistently raised dividends over the last ten years, from 92 cents in 2011 to an annualized $2.28 currently. Speaking of superlatives, Exxon pays more money in dividends than any company in the world, now more than $10.7 billion annually.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.