Exxon -57% in 77 days and now BULL MARKET?
Updated
Thanks for viewing.
- Exxon lost 57% in 77 days and has since bounced strongly - so are we in a new bull-market?
I would give my answer as a resounding no. Why?
- Mostly because crude oil is at 30 year lows which renders all upstream activities drastically unprofitable - how unprofitable? Some estimates of Exxon's break even price per barrel are over $70 a barrel ($74 in this article; theguardian.com/business/2020/mar/09/saudi-arabia-price-war-wipes-billions-from-value-of-major-oil-firms-royal-dutch-shell-bp). So each barrel produced, is produced at a significant loss. It would be far more profitable to buy crude on world markets and stop all exploration or production. This would probably not be a long-term solution, but it is being considered instead of locking in a $60 plus loss per barrel.
- It seems that at these crude prices that Exxon may even need to write down the value of all exploration and production assets to, or close to, zero. This happened recently for unprofitable shale oil producers - all their equipment was specialised, involved in a now universally unprofitable industry, with few buyers, and would have cost more to transport than would be gained from any sale - so when reality struck, it struck hard.
- If suddenly forced to re-value oil reserves they would have a negative value as the oil would cost far more to extract than to leave in the ground. The option to "just stop extraction" isn't there in some cases - as capping a well may damage the resource and incur significant future expense to re-open.
- This is a situation similar to that faced by European (and soon American) Banks due to negative interest rates; They now have liabilities on both sides of the balance sheet. The liabilities remain liabilities, but what were once assets are now cash-flow negative. Pretty hard to make money like that.
- What hope is there? Oil prices may rise, but not in 2020 I feel. So some pain will need to be incurred.
- The Fed is acting as buyer of last resort picking up corporate debt at 100 cents on the dollar with no regard to the credit-worthiness of the issuer. Although, they are not targeting individual Companies yet and Oil and Gas businesses continue to announce bankruptcy.
- The consumer (downstream) activities may still be profitable, although the overall revenue should be expected to be down.
I read two forecasts for EPS to be reported tomorrow. $0.04 from Investing.com and a consensus expectation of $0.02 from another site that had a view that prices would rise 10%. If you are bullish on earnings like that, I don't see how.
Anyway, let's see what happens. Protect those funds (I see prices below $23 before the end of '20).
- Exxon lost 57% in 77 days and has since bounced strongly - so are we in a new bull-market?
I would give my answer as a resounding no. Why?
- Mostly because crude oil is at 30 year lows which renders all upstream activities drastically unprofitable - how unprofitable? Some estimates of Exxon's break even price per barrel are over $70 a barrel ($74 in this article; theguardian.com/business/2020/mar/09/saudi-arabia-price-war-wipes-billions-from-value-of-major-oil-firms-royal-dutch-shell-bp). So each barrel produced, is produced at a significant loss. It would be far more profitable to buy crude on world markets and stop all exploration or production. This would probably not be a long-term solution, but it is being considered instead of locking in a $60 plus loss per barrel.
- It seems that at these crude prices that Exxon may even need to write down the value of all exploration and production assets to, or close to, zero. This happened recently for unprofitable shale oil producers - all their equipment was specialised, involved in a now universally unprofitable industry, with few buyers, and would have cost more to transport than would be gained from any sale - so when reality struck, it struck hard.
- If suddenly forced to re-value oil reserves they would have a negative value as the oil would cost far more to extract than to leave in the ground. The option to "just stop extraction" isn't there in some cases - as capping a well may damage the resource and incur significant future expense to re-open.
- This is a situation similar to that faced by European (and soon American) Banks due to negative interest rates; They now have liabilities on both sides of the balance sheet. The liabilities remain liabilities, but what were once assets are now cash-flow negative. Pretty hard to make money like that.
- What hope is there? Oil prices may rise, but not in 2020 I feel. So some pain will need to be incurred.
- The Fed is acting as buyer of last resort picking up corporate debt at 100 cents on the dollar with no regard to the credit-worthiness of the issuer. Although, they are not targeting individual Companies yet and Oil and Gas businesses continue to announce bankruptcy.
- The consumer (downstream) activities may still be profitable, although the overall revenue should be expected to be down.
I read two forecasts for EPS to be reported tomorrow. $0.04 from Investing.com and a consensus expectation of $0.02 from another site that had a view that prices would rise 10%. If you are bullish on earnings like that, I don't see how.
Anyway, let's see what happens. Protect those funds (I see prices below $23 before the end of '20).
Note
Exxon’s Humbling Fall From Oil Juggernaut to Mediocre Company ["bloomberg.com/features/2020-exxonmobil-coronavirus-oil-demand/"] An excellent article released today by bloomberg detailing how Exxon got $0 debt to 50b and to a break-even crude price of $77. They reported quarterly losses of over 600m this Friday... but are still paying a dividend (slap that straight on top of the debt pile). Hard to see any sources for optimisim in the stock. Nowhere near any sort of profitability in short, medium, or (if it ever get there) long term.Note
Oh that's nice; Warren Buffet agrees with my view youtu.be/vIngphxp9dgNote
Watch the $30.11 level next. I don't expect it to act as strong support and any move below that level will mean further correction.Note
That test of $30.11 probably next week. Considering other large oil and gas Companies have already fallen below a comparable point, I wouldn't expect $30.11 to hold as support. Another leg down seems like a likely scenario with support between $24 and $19.Note
Yes they probably will keep paying dividends (because if they don't they will be removed from all those "dividend aristocrat" ETFs which will be another headwind on their stock price. Typically, when a stock is removed from a major ETF, it tanks their stock price as it represents a "forced sell" by a significant portion of the market). But, should they be taking on more debt to pay increasing dividends (which will further increase their costs and their break-even crude price)? I would say, probably not.Recently the stock market has become largely speculative in nature (e.g. TESLA has a value of over 1200 times its annual earnings), which is a destabilising factor. Eventually, if a stock does not return cash to its investors (without the cash being from credit or from asset sales) - it will be divested. By that logic, I cannot see a $70+ per barrel in the short to medium term due to lower commercial activity. So, it may be some time before XOM are able to sustainably return to profitability - and that is the question people should be asking instead of whether or not they will continue to pay a dividend.
If they decide not to pay a dividend next time, or reduce it, that will be more prudent, but it would "pull the rug out" from beneath investors and the stock would settle lower. So, if you invest in an unprofitable Company just to take advantage of their (credit derived) dividend, your investment is solely reliant on the continuation of their dividend policy.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.