XOM - Exxon

[ratiman]

Last year Exxon made $6.5B of free cash flow and currently trades at over $350B, for a trailing free cash flow yield below 2%. If that isn't enough to get value investors excited, it also replaced 2/3 of reserves and borrowed $9B to pay the $12B dividend.  The $3 dividend is probably propping up the stock.

 

Somebody mentioned that Exxon was trading at a record ratio to WTI, so I decided to take a look at that. The ratio got really high back in the late 90s because oil was so cheap. Today it's at an extreme probably through some combination of low oil and a high stock price. Even if oil were to return to $55, the ratio would still be over 1.5 vs a historical range between .70 and 1.

 

http://36.media.tumblr.com/118bd6215ff2c230f3986922b18cf98e/tumblr_o4x9qjpkGF1qm0t57o1_500.png

[thepupil]

I'm short at an average cost of $79 or so. Simplistic and dumb thesis is that it's priced for a recovery that may or may not happen and I own other stuff with some oily-ness that has a lot more upside if a big time recovery does happen.

 

I'm sure someone may argue that they'll make a great acquisition, that oil has to go up, that they are guaranteed to survive which isn't true of almost any other long in the space, and I would  agree with those points. just thought that it was asymmetric. So far it's worked, XOM is up about 5% and other stuff I was buying at the time (namely FOR, texas RE and some oil assets I thought you were getting for free) is up 30-50%. Maybe that can be "explained by the differences in beta" or the massive difference in quality , maybe that's a little luck, but I continue to think XOM is a poor risk / reward as a long and an okay, albeit lazy, short. <--It's a lazy short for me at least, I'm sure there are some people who model every project and come to similar conclusions (like Chanos).  I don't mean to imply that that is a sane pair trade at all btw, because it isn't.  Also when I was shorting it, everything US industrial / economic growth related was dropping like panties on prom night and XOM is in part chemicals business.

 

I honestly have nothing to add and didn't bother to open an annual report. Just said  $8-$9 EPS in $100 oil the last time around, let's bump that up to $10 for fun, throw a 12X multiple on it and $120 = upside case, only 50% for a massive move in oil = no upside leverage, but if oil stays kind of down here it's like 10 to infinity multiple points above historical average multiple. I could be wrong and it isn't a big position. it's a nice short in that you can hedge it cheaply if you really want (with OTM calls), it is impossible to get taken out, very low margin requirements and oceans of liquidity etc.

 

I would love to hear a long case at this price. I would think it would revolve around oil and gas prices going up and a a lot of projects that have a lot of upfront capex coming online.

[Libs]

I would argue Chevron is even worse off. Fewer downstream assets, negative FCF, borrowing to pay the dividend. What a mess. LNG is not going to save them either.

I'm short Chevron and also own Jan 2018 puts. Oddly, I feel like time is on my side with the puts: every day oil stays below $60 is a day closer to the market realizing CVX is not worth $170B.

What's the term everyone is using? Dividend bubble? That's what I think these are.

 

[ratiman]

$100B could be sliced off the market cap and the stock would still not be cheap. But it's hard to argue with success, stock has been a huge winner over the years for a lot ordinary investors. The long case is that it might not go up, but it won't go down, there are too many loyal income investors out there. 

 

Yeah, Chevron is even more out of whack with WTI.

[ratiman]

The amount of ordinary investor interest in Chevron is huge. Seeking Alpha gets a new article every few days:

 

Chevron To Break Through $100 Shortly

Chevron: Stay Long For More Upside

More Reasons Why Chevron Will Continue Turning Around

Chevron - This Turnaround Is Here To Stay

Chevron: Gorgon LNG, Mission Accomplished

Oil To Break Out: Adding Chevron

Don't Sell Chevron

 

That's just the most recent articles. People are pretty excited about Chevron. Meanwhile, oil is at $35.

[Picasso]

The amount of ordinary investor interest in Chevron is huge. Seeking Alpha gets a new article every few days:

 

Chevron To Break Through $100 Shortly

Chevron: Stay Long For More Upside

More Reasons Why Chevron Will Continue Turning Around

Chevron - This Turnaround Is Here To Stay

Chevron: Gorgon LNG, Mission Accomplished

Oil To Break Out: Adding Chevron

Don't Sell Chevron

 

That's just the most recent articles. People are pretty excited about Chevron. Meanwhile, oil is at $35.

 

Probably one of the best signs I've seen to short that stock.  Don't even look at the valuation or borrow rates.  Just short it. 

[Libs]

The amount of ordinary investor interest in Chevron is huge. Seeking Alpha gets a new article every few days:

 

Chevron To Break Through $100 Shortly

Chevron: Stay Long For More Upside

More Reasons Why Chevron Will Continue Turning Around

Chevron - This Turnaround Is Here To Stay

Chevron: Gorgon LNG, Mission Accomplished

Oil To Break Out: Adding Chevron

Don't Sell Chevron

 

That's just the most recent articles. People are pretty excited about Chevron. Meanwhile, oil is at $35.

 

Probably one of the best signs I've seen to short that stock.  Don't even look at the valuation or borrow rates.  Just short it.

 

Sarcasm duly noted. As I see it, many here are taking flyers on small energy plays that could go up 3X if oil goes to $60. That makes some sense. But CVX longs need $60 oil to make minor returns from here. That makes no sense, and I'm happy to be on the other side of that bet.

I don't need to do a lot of math to know where CVX will be in a year if oil is still at $35.

[Picasso]

I'm not being sarcastic.  Sorry if it came off that way.  I just think that kind of retail investor Seeking Alpha headline flow screams short me.  You don't even need to run any fancy models. 

[Libs]

I'm not being sarcastic.  Sorry if it came off that way.  I just think that kind of retail investor Seeking Alpha headline flow screams short me.  You don't even need to run any fancy models.

 

Sorry Picasso.

[Pelagic]

I'm not being sarcastic.  Sorry if it came off that way.  I just think that kind of retail investor Seeking Alpha headline flow screams short me.  You don't even need to run any fancy models.

 

Yes and no. You have to remember how SA authors are incentivized. A little over 150,000 people follow CVX, if an author is going to spend an hour or two writing an article, it usually makes sense to write it on a highly followed company. CVX is a "safe" bet for authors since a lot of the analysis in the article relies on something no one can really predict - oil prices, and they can parrot their favorite oil bulls liberally in the article.

 

From the Chevron: Gorgon LNG, Mission Accomplished (I picked it since it had the most comments)

Emailed to: 510,826 people who get Investing Ideas daily and 246,618 people who get Energy Investing daily.

Author payment: $35 + $0.01/page view.

 

Authors write to make money, not because they're necessarily highly opinionated about the stock and reading a directional bias from articles aimed at retail investors is a bit of a stretch IMO. Now the comments, they're a different story, I'm continually amazed at how emotional some people get about investing.

[philippoc93]

J Mintzmyer on SA has a detailed article from earlier on in February explaining why CVX is his favourite short for 2016. You should see the push back he got off it in the comments. However, I found his article to be detailed and based on sound logic and facts.

 

Definitely worth reading if considering a short position on the stock

 

http://seekingalpha.com/article/3841766-chevron-best-short-idea-2016

[ratiman]

After looking into this a little more, it turns out there really isn't much of a connection between the price of oil and Exxon. The market is smart enough to ignore the oil price. Below is Exxon during the late 90s oil market when oil reached $10.

 

But Exxon today is nothing like Exxon then. Exxon today has a dividend yield about the same as P&G and Coke, not like a high cost commodity company facing new, lower-cost competitors. BP and RDS, maybe because they're foreign, have 7% and 8% yields, which is more rational for a company borrowing to pay the dividend.

 

http://40.media.tumblr.com/de36d01b0e1b7c4b41f18b12b989e7b1/tumblr_o5bzzyP6Yk1qm0t57o1_1280.png

 

 

[doughishere]

https://charlierose.com/videos/28073

 

JOHN WATSON

Tuesday 05/17/2016

The chairman and C.E.O. of Chevron discusses oil prices and renewable energy.

 

 

[thepupil]

So I'm resurrecting this thread 2 years later.

 

XOM declined by about 10% for a total return of -2.5% with divvies

XOM over the past 2 years has underperformed the S&P by 45% (20% per annum)

XOM over the past 2 years has underperformed the S&P 500 energy index and the E&P ETF by 28% and 24% (7-10% / annum).

 

Over this time period, Oil has gone from $37-->$60 and corporate tax reform was passed.

 

I'm curious if anyone owns or has looked at this.

 

It was seemed pretty obvious to me from a high level that this was expensive/mispriced 2 years ago.

 

I think it may be borderline interesting today (for a dumb schmuck like me w/ no other energy exposure).

 

 

 

 

 

 

[EricSchleien]

Something interesting about XOM. I don't have a position long or short but thought this was interesting. Was at a wedding a few weeks ago with my gf and got into a conversation with this guy who was an engineer at Phillips 66. He thought XOM was a joke when it came to design standards and he said there's so much beauracratic bullshit over there that they do things very inefficiently.

[Spekulatius]

So I'm resurrecting this thread 2 years later.

 

XOM declined by about 10% for a total return of -2.5% with divvies

XOM over the past 2 years has underperformed the S&P by 45% (20% per annum)

XOM over the past 2 years has underperformed the S&P 500 energy index and the E&P ETF by 28% and 24% (7-10% / annum).

 

Over this time period, Oil has gone from $37-->$60 and corporate tax reform was passed.

 

I'm curious if anyone owns or has looked at this.

 

It was seemed pretty obvious to me from a high level that this was expensive/mispriced 2 years ago.

 

I think it may be borderline interesting today (for a dumb schmuck like me w/ no other energy exposure).

 

There are most likely better bets it there, but XOM has such a long history of being a superior operator and still a bulletproof balance sheet, that I do think they are interesting for a LT buy and forget Energy allocation in a portfolio.

[investmd]

So I'm resurrecting this thread 2 years later.

 

XOM declined by about 10% for a total return of -2.5% with divvies

XOM over the past 2 years has underperformed the S&P by 45% (20% per annum)

XOM over the past 2 years has underperformed the S&P 500 energy index and the E&P ETF by 28% and 24% (7-10% / annum).

 

Over this time period, Oil has gone from $37-->$60 and corporate tax reform was passed.

 

I'm curious if anyone owns or has looked at this.

 

It was seemed pretty obvious to me from a high level that this was expensive/mispriced 2 years ago.

 

I think it may be borderline interesting today (for a dumb schmuck like me w/ no other energy exposure).

 

There are most likely better bets it there, but XOM has such a long history of being a superior operator and still a bulletproof balance sheet, that I do think they are interesting for a LT buy and forget Energy allocation in a portfolio.

 

Resurrecting this thread 3 years later.

XOM now down 20% over past 3 years before dividends. Has dropped 10% within past 3 months which has led to a dividend yield of 5% on a "blue chip" stock at a time when Tbills are <3%. While recognizing that the past is not a reflection of the future, how much emphasis can one put on fact that XOM has increased dividends annually for the last 37 CONSECUTIVE years!?!

 

XOM is such a large integrated player, I assume that they will be part of the future of energy - regardless of whether the future is oil, solar, nuclear or something we haven't heard of yet. As the future evolves, XOM will own part of it. World will always need energy in one form or another. In the meanwhile, there is a juicy dividend to pay one for waiting.

 

At $70 is now a good time to buy or is one catching a falling knife??

[awindenberger]

If you like Exxon at 5% dividend, you might want to consider Shell and its 6.5% dividend. Shell is also looking forward better and already investing reasonable sums into renewables ($2-3B annually). They have a goal to be the #1 electric power provider in the world by the 2030s.

[Tomahawk25]

True to form, XOM has arguably gone "all in" on oil, gas/LNG compared to the other majors. Royal Dutch, Total, Repsol have all made large renewables investments, both hedging themselves and transitioning outright.  One could argue a purchase of XOM is a belief that oil lasts much longer than common forecasts as a major fuel source.  I am not so sure XOM will be as much a part of other future energies like solar/wind given their project focus (Permian drilling, LNG in Papua New Guinea, Mozambique- can someone tell me a large XOM renewable project i'm not aware of? )  Now if XOM was priced almost like a cigar butt, with an understanding that oil would be phased out by Year X and as much FCF generated as possible, that might be more interesting.  Especially if hydrocarbons did "dominate" as transport fuel longer than expected.... 

[investmd]

XOM may now be priced like a cigar butt? I thought it was attractive below $70 - ha! It's now @$38 with a P/E of 12.

 

Dividend yield of 9% when interest rates are at record lows & company has a 37 year history of consecutive dividend increases. Next dividend announcement I believe is in May. Let's see if they halt their 37 year streak.

I have been buying the dip.

[thepupil]

I'm long as  the anchor tenant in my "I'm an idiot and don't want 0% energy" basket that is thus far a contained disaster to use the language of the day.

 

I don't think it's priced like a cigar butt, but has gotten more asymmetric to the positive. If we operate under the assumption that management is credible [i'm not 100% sure on this], XOM will earn $15-$50 billion in 2025 at $40-$80 brent.

 

That sounds kind of cool at $160 billion market cap. 3-10x out year earnings is a nice asymmetric starting point.

 

But that takes a lot of capex to get to that level of earnings potential at these prices, operating cash flow will absolutely not pay for that capex and the dividend.

 

the right thing to do is what OXY did, even though XOM's situation is far better. collapse the dividend, keep playing offense on capex /growth projects maybe even m&a [could double down on the permian or marcellus or something with an over levered producer with great resources], maintain the debt cost of capital advantage (I would argue the stock at these levels already expects a cut) and allay fears of overextension/continued balance sheet deterioration.

 

it would be better for XOM to lose its dividend king or aristocrat status than to see its credit rating suffer.

 

as an owner of the business, I'd like to see a 100% dividend cut.

[benhacker]

Senior leaders at the company get paid dividends on unvested shares. A dividend cut which is preemptive is very very unlikely for this reason.

[Spekulatius]

I'm long as  the anchor tenant in my "I'm an idiot and don't want 0% energy" basket that is thus far a contained disaster to use the language of the day.

 

I don't think it's priced like a cigar butt, but has gotten more asymmetric to the positive. If we operate under the assumption that management is credible [i'm not 100% sure on this], XOM will earn $15-$50 billion in 2025 at $40-$80 brent.

 

That sounds kind of cool at $160 billion market cap. 3-10x out year earnings is a nice asymmetric starting point.

 

But that takes a lot of capex to get to that level of earnings potential at these prices, operating cash flow will absolutely not pay for that capex and the dividend.

 

the right thing to do is what OXY did, even though XOM's situation is far better. collapse the dividend, keep playing offense on capex /growth projects maybe even m&a [could double down on the permian or marcellus or something with an over levered producer with great resources], maintain the debt cost of capital advantage (I would argue the stock at these levels already expects a cut) and allay fears of overextension/continued balance sheet deterioration.

 

it would be better for XOM to lose its dividend king or aristocrat status than to see its credit rating suffer.

 

as an owner of the business, I'd like to see a 100% dividend cut.

 

I am pretty sure they have to cut the dividend at these prices, Same for the other majors. The majors can last a long time at the conditions, if they can make some money on their downstream operations. I think RDS is the most diversified, followed by XOM, BP and then CVX. CVX was the most oily when I looked at them a few years ago. RDS is Very gassy (they bought British GS), but at least LNG is anchored by crude prices as well and will be impacted.

 

Vitali Katelson mentioned Equinor, the Norwegian national oil company. They are very heavily taxed on their upstream earnings on the Norwegian shelf, which makes their cost structure very variable. I don’t think they can last at $20 crude though.

[TwoCitiesCapital]

Yes - I unfortunately started to roll my proceeds out of my multi-year long in Gazprom into Exxon in early February :/

 

The prices here are fantastic, but I disagree that oil will reprice in a few months. I think between a global slow-down and the oil war we'll see low prices for the remainder of 2020. With credit spreads at the highest they've been, companies are unlikely to go to market with debt so they'll need to slash dividends to sustain balance sheets and enhance liquidity.

 

When the dividends are cut will likely be the time to do the buying.

[ratiman]

There was some discussion at the top of this thread about CVX and it looks like the ratio between CVX and XOM is historically extreme:

 

 

I don't quite know why CVX is so much more popular than XOM but CVX doesn't have as strong a balance sheet as XOM, so it should actually be in worse shape.