A look at ExxonMobil

Previously I talked a little about commodity stocks. I came across this rather interesting article on Seekingalpha.com, which prompted me to share this information with my readers.

I have been long on Oil and Gas for some time but stayed out because it was too expensive, but the 2008 market crash gave me an opportunity to get into ExxonMobil (XOM).

Anyways the original author of the article has some very interesting graphs on energy demand and population growth predictions till 2040. See below graph 1-World energy Consumption and graph 2- World population growth:

Graph 1: World Energy Consumption

Graph 2: World population growth

There is a huge correlation and we have a reason to be bullish about companies such as ExxonMobil who are extracting and supplying these commodities. Over the last 100 years, world population has increased 7 times, and it is headed towards 9 Billion by 2040. Although I may not agree totally with this figure, I still agree that population is headed higher. 

Side note: I still remember while I was studying a Sustainable Engineering module in University, world population is expected to hit 10 Billion by 2030 then start declining. This is unsustainable, because Earth’s resources cannot continue to support such a large population; famine, draught, disease and war will eventually reduce population growth to a negative.

Back to topic, ExxonMobil published their 2013 Energy Outlook , which predicts 9 billion people by 2040 for some reason. Energy demand is going to increase exponentially because of two main drivers:

1. Population growth
2. Per Capita consumption growth

For a long term investor, it’s a clear cut decision to get on the bandwagon without worrying about day to day price fluctuations. However I suggest valuating energy companies such as ExxonMobil before taking any positions. I value XOM @ $94 currently but actually wouldn’t pay $90/share right now. It’s not worth the risk for me. I would rather wait and see if I can get in @ below $65/share.

Anyway WHY EXXONMOBIL? The original author also shared these graphs below comparing shareholder distributions among energy companies:

Graph 3: Comparison of Shartholder distributions

Graph 4: Distribution yield of ExxonMobil

ExxonMobil has a whopping! distribution yield of 7% over the past 5 years. Keeping in mind increasing energy demand over the next 30 years, and relative stability of XOM as a company makes it a good investment of choice. Just look at their historical chart below:

Very rarely does it drop tremendously low. in fact it has been trading in a parallel line since 1960s. I would suggest taking advantage of every market crash and accumulating its stocks over time. But of course, dont take my word for it...do your own research first. :)

Original Article by DevonShire can be found at address below:
http://seekingalpha.com/article/1293481-exxon-mobil-sports-a-juicy-and-reliable-total-distribution-yield-over-7

Disclaimer: I have a small position in ExxonMobil (XOM) and right now I am adopting a “hold and see” attitude. However I have no plans to initiate any positions within the next 72 hrs and highly recommend you do your own research to determine your own suitable entry and exit positions.

Insights On Commodity Stocks

Given the current inflationary environment, it is good to diverfisy your portfolio to include some commodity based stocks. Many companies benefit from rising commodity prices which we are observing over the past 12 years.

If you are bullish about certain commodities, you might want to purchase shares in companies that are involved in their production. But consider doing your own research into the company business structure before investing any money into it, like whether they have ownership of the commodities or provide services for the extraction and procurement of these commodities. For example Apache (APA) is involved in oil and gas exploration but they would hire other companies such as Haliburton (HAL) to drill for them. Haliburton will make money regardless of whether they find anything. However, Apache will benefit the most if they do something. Exxon Mobil (XOM) is one of the biggest player when it comes to Oil & Gas exploration, yet they would not actually compete with Apache (APA). On the other hand, Haliburton has to compete with say...Schlumberger (SLB) for drilling contracts. If oil prices were to rise, drilling companies do make more money but the competitive nature of drilling business would undermine their profits. (i.e. not making as much as they should because they compete on price and quality of service)

Lets look at another commodity, copper. Copper is one the most widely used commodity in the world, however companies producing this commodity is depending on other commodities. If oil and steel prices appreciate faster than copper prices, then a copper producing company may suffer even if copper prices rise. This is because they use oil-fueled machines built with steel to extract and ship copper. Therefore it is vital to assess the real situation before investing in commodity stocks. We need to choose which commodity companies will perform better, considering the risks properly, it will allow hedging against inflation with some capital gains.