Since the oil crash of 2014 that saw a price drop of about 40%, there has been an almost unanimous consensus from investors to stay within arm’s length from heavy oil dependent stocks, e.g. Exxon Mobil, Shell, BP, etc. In addition to this apparent death blow on the commodity, the rise in the use of electric vehicles proliferated by Tesla has prompted countries like Norway to ban combustion vehicles in the near future.
This fact alone could represent the nail in the coffin for oil as a commodity, and alongside it, big oil companies, since one of the biggest drivers of oil demand is, in fact, gasoline fuelled cars.
Breakdown of the uses of an average barrel of oil:
It seems quite evident that the general investor is right about the future of Big Oil companies, but what if there is more to it? Does that mean that investing in any of the oil giants is a bad investment and are they really bound to die?
The Case for XOM
The king of Big Oil has to be hands down Exxon Mobil, even after the oil crash the Texas based company is the largest energy company in the world and 9th largest overall. The company is coming off a 52-week low and seems to be picking up some steam among some analysts.
So the first common assumption, that Big Oil companies like Exxon Mobil, are in a permanent downward spiral of doom, and that no investor can profit from them as long as oil prices don’t recover, turns out to be wrong. But are the other assumptions justified?
The Oil Market of the 90s
The following graph indicates the historical prices of oil as long as data on it is available. The main focus of this graph is the period between 1990 and around 1998, where a massive drop of about 40% happened, almost the same percentage amount that we face currently.
So this has happened before. Yet, big oil companies are still here. Of course, past data is by no means a predictor of the future. Concluding that Exxon Mobil survived a 40% drop in oil prices in 1998, and can henceforth survive a similar drop now is as valid as predicting future stock performance from historical data – in other words, not at all.
Return of XOM During the 90’s?
The next graph has the purpose of evaluating how Exxon Mobil fared during the crisis of 1998. This gives a good proxy of what happened to the investors that held XOM during the oil crash of 1998.
As can be seen, by the upward trend, investors who owned the company’s stock during the crisis enjoyed a steady return. It didn’t seem like a bad idea to invest in a big oil company during the oil crash of 1998. Once again, past data can’t predict the future of ExxonMobil, but it does say something about its track record and experience as a company.
There has to be more to ExxonMobil that just the price of the oil.
What About the Intangibles?
ExxonMobil boasts of having perhaps one of the best management teams in corporate history, they have been through every business cycle imaginable. Rex Tillerson, the current secretary of state was the CEO of ExxonMobil from 2006 until 2016, before that he was involved as a production engineer for 40 years under Exxon and during the crash of 1998 he was appointed Vice-president, he has a few notches in his belt, so to speak.
People like Tillerson are abundant in ExxonMobil’s management, they perfectly understand: when to pay off debt, when to take on debt, when to increase CAPEX, when to cut the employee force, when to hedge the price of oil, when not to hedge the price of oil, etc.
All this managing expertise drives earnings up. This is why ExxonMobil is able to create shareholder value regardless of the current macros.
Its management advantage can also be observed within the same industry relative to ExxonMobil competitors. Where both its costs per barrel are the lowest and its earnings per barrel the highest.
The threat to fossil fuel from electric vehicles is very real, and hopefully, fossil fuels will not be needed anymore since the damage to the world’s climate is evident. In addition to this, the macroeconomic picture is by far less than optimal for companies like Exxon Mobil. However, sceptical investors might want to reconsider their stance, lest they overlook some value opportunities for their portfolios.
UK Gas Prices Surge Following Deadly Austrian Explosion
Gas prices have soared to their highest level since 2013, following an explosion at a natural gas hub in Austria, which threatened supplies already affected by a closed North Sea pipeline.
UK natural gas prices jumped 23% – to 73.7p a therm – on ICE Futures Europe ($9.86 a million British thermal units).
The blast, at Austria’s Baumgarten import hub, happened at around 9 a.m. and left at least 18 people dead. This interrupted flows at one of the main points where Russian natural gas enters Europe. This follows two days of snow in London and cold temperatures elsewhere in Europe.
Arne Bergvik, chief analyst at Swedish utility Jamtkraft, has said that it is the “worst possible time” for a big gas hub to burn, as capacity is needed ahead of the winter and it changes the expectations of how much gas there will be available. He said:
“If weather turns colder and capacity is unavailable, it will absolutely drive up power prices.”
Both gas and oil prices were already affected this week, due to the shutdown of the Forties Pipeline System, which delivers around 40% of the commodities from the UK North Sea.
Rising energy costs are contributing to the UK’s high inflation rate, which increased at 3.1% In November, its fastest pace in five years.
Why Bitcoin Is Not Chipping Away at Demand for Gold
The simultaneous rise of bitcoin and relatively poor performance of gold has provoked many to ask whether the two assets are in competition. The short answer is no, they are not.
“Bitcoin has real potential, if it were to become digital gold it might have tremendous space to grow,” said Gabor Gurbacs, Vaneck Securities Director of Digital Asset Strategy. It is this sentiment which has put the two in contest. However, the investor pool for each is “vastly different”, according to Jeffrey Currie, head of commodities research at Goldman Sachs.
Gold based exchange-traded funds are currently at close to their highest since May 2013, suggesting the metal remains part of investor’s portfolios, and not that investors have not cashed out and moved over to bitcoin. The reason this is not the case lies in comparing the function each asset serves and the investors it attracts.
Comparing Bitcoin and Gold
Bitcoin attracts more speculative investors looking for quick returns, while gold is often held as a portion of investment portfolios to spread risk. In times of economic downturn gold tends to go up in price, balancing any losses from stocks and bonds. The two assets currently serve distinct purposes. Consequently, bitcoin’s price rise is unlikely to have turned investors away from gold.
Oil Prices Rise as UK Major Pipeline Closes for Repairs
Oil prices have reached a two-and-a-half-year high after a hairline crack was found in one of the world’s most important oil conduits. The Forties Pipeline System, which carries 40% of North Sea oil and gas, is closing for repairs after the fault was found near Aberdeen, Scotland.
This pushed Brent crude to over $65 a barrel, which it hasn’t reached since June 2015.
Tom Crotty, Director of Ineos Group, which operates the Forties network, said that the pipeline’s closure is a “force majeure situation” that will prevent the operator from moving oil through the system for the next two weeks. He said that they will know in the “next few days” how long the system will be closed for. Although routine maintenance work on pipelines is common, closures related to cracks of this nature are not.
Oliver Jakob, an analyst at Petromatrix, a Swiss-based consultancy, said:
“It’s more than just a supply disruption because it’s more significant as a price maker. There’s one thing which is the volume of oil which is lost, but it’s also that it’s a key price benchmark.”
Also, according to McKinsey Energy Insights, the closure may benefit sellers the Middle East and Asia-Pacific region as buyers look at alternatives to the North Sea supply.
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