When anyone offers you a gilt-edged, can’t miss, sure thing opportunity … walk away. Every investment carries risk. This is especially true in the oil patch, circa 2019.
Over the last six months shares in Exxon Mobil (NYSE:XOM) have fallen 10%. It is evident the “peak oil” theory of the 1970s was wrong. New technology can bring up enough to burn the people of this planet alive. It’s doing just that.
So it is that the Saudi Aramco road show has begun. The Saudis say their company made $111 billion of profit last year. It wants to price the whole at $2 trillion.
Why sell? The Kingdom wants to diversify. It wants to invest in solar, and in things like the Softbank (OTCMKTS:SFTBY) Vision Fund.
Like the man said, a fool and his money were lucky to get together in the first place.
South America’s Aramco
Exxon Mobil is the West’s Saudi Aramco.
The company has found what it claims are more than 6 billion barrels of oil equivalent off the coast of Guyana. It plans to produce 120,000 barrels per day there next year, double it in 2023, and grow from there.
Exxon is also pressing the accelerator on Texas’ Permian Basin, hoping to extract 1 million barrels a day from there in five years. It thinks it can make money there at $35 per barrel.
But the world is awash in oil, said outgoing Energy Secretary Rick Perry. Exxon profits were cut in half this year as a result. XOM stock is depressed.
A Yield Trap?
The bearish commentary and a poor short-term outlook in 2019 make Exxon Mobil stock tempting to income investors.
At its opening price of just about $72 this morning, Exxon’s 87 cents per share quarterly dividend yields over 5.1%. That’s almost as much as AT&T (NYSE:T), which yields 5.3%.
But like AT&T, Exxon has a ton of technology debt to work off. Its debt peaked last year when it bought out the Bass family for the Permian assets.
Bulls say not to worry. Exxon Mobil has $48 billion of operating cash flow per year. But my InvestorPlace colleague Will Ashworth wrote in August that Exxon was overpriced and he turned out to be right.
Short-Term Bull
As a trade, I can see XOM stock rising through Christmas.
Producers are putting the brakes on shale. Iran’s recent attack on Saudi oil facilities has people nervous.
No one really knows how much oil is in the ground. At the current WTI price of $56.70 a barrel, there’s plenty of room for Exxon to make money.
Oil spills have the perverse effect of boosting oil prices, because spilled oil must be replaced. With the Saudi Aramco IPO scheduled for next month, prices might firm.
Bottom Line on Exxon Mobil Stock
Right now, Exxon Mobil stock is a trade for speculators and a buy for income investors.
As with AT&T, I think it’s a yield trap, although some of our best analysts here disagree with that AT&T call. I could be wrong again.
To me it means you trade XOM stock today, using options, taking some downside protection and probably making some coin. The Saudis can manipulate the market to get their price. This will prove beneficial to Exxon Mobil.
I can even see some income investors taking a flyer on Exxon stock. That yield is awfully attractive. The cash flow is there to pay it. But keep one finger hovering over the sell button. This is not the long-term play you are looking for.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.