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.