Exxon Mobil Corporation (XOM): There’s Only Darkness at the End of the Tunnel
May 05, 2016 – by Richard Band
There’s little doubt that Exxon Mobil Corporation (XOM) will be around another several decades, but its transformation from its current shape may well be underway.
This massive oil and gas giant is the biggest publicly held energy company in the world. Its market cap is almost $370 billion, and it’s the world’s eighth largest company by revenue.
That is a sizable company that is well respected for its endurance and management — in bad as well as good times.
Don’t forget that XOM is basically the direct descendant of the John D. Rockefeller’s original Standard Oil Corporation — the company that started the U.S. oil boom. But since its inception in 1870, Standard Oil had seen plenty of challenging times, particularly when it was broken up by the Sherman Anti-Trust Act in 1911.
The Act specifically targeted the major industrialists that were expanding railroads and shipping and banking steel and oil across the expanding U.S. landscape. The industrialists were interested in maintaining control of all they surveyed, and they generally kept out of each other’s way.
It wasn’t until more than a century later that XOM reunited Exxon (formerly Standard Oil of New Jersey) with Mobil (formerly Standard Oil of New York). Since then, XOM has been the guiding star in the oil and gas industry.
Exxon Mobil is not a sexy company, nor is it a hasty company. It has a long view of its markets and has built a massive company that can afford to be far more patient than most investors. But it is reliable and rock solid, for more than 140 years.
But that brings us to last week when Standard & Poor’s downgraded XOM’s credit for the first time since the Great Depression. Its AAA bond rating was cut to AA+.
What the Downgrade Means for XOM
The sad fact is, as we have seen from these rating agencies during the most recent financial meltdown, they’re the poster children for closing the barn door after the horses have left.
Having seen the energy markets get hammered by an oversupply of Saudi oil, and a surfeit of U.S. natural gas that has no export avenues, it shouldn’t come as a surprise that XOM isn’t exactly in top fighting form.
Also bear in mind that Exxon Mobil currently carries a price to earnings ratio of 28. That’s a pretty stunning growth expectation for a sector leader that is in a stagnant sector.
This credit downgrade is important because it changes the way the company will use its cash for dividends and stock buybacks at minimum. It’s not good for shareholders, much less bondholders.
And while we can’t look to the S&P for its foresight, it is important to recognize that by making this bold move, it is saying something about the oil and gas industry — things aren’t going to get much better anytime soon.
A recent example is the news last Friday that Chevron Corporation (CVX) earnings for Q1 showed a loss of $725 million. And then CVX announced it was cutting another 1,000 jobs, which puts the total to 8,000 workers (about 12% of its workforce).
This is a sign of the times for all the big oil companies.
And the small ones are doing even worse, especially in the upstream segment (exploration and production) in the U.S. Small firms are imploding. And even Exxon Mobil’s U.S. upstream segment almost doubled its losses in Q1 compared to Q1 last year.
The energy patch has yet to find any direction and there’s really no safe port in this odd storm. For now, it’s best to simply avoid the sector.
And if you have XOM, it’s a good time to think about redeploying those assets. There are plenty of other stocks and sectors that have a clearer upside right now.
Editors Note: We’ve corrected statements pertaining to the history of Exxon Mobil. The company was split up in 1911. Exxon was formerly Standard Oil of New Jersey, and Mobil was formerly Standard Oil of New York. We apologize for the errors.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.