Investors owning energy stocks have been understandably nervous as crude oil crashed from over $100 a barrel to the mid-$40 range.
Retirement investors in particularly may be feeling very nervous. Oil stocks have consistently been a favorite portfolio holding for income investors, who have relied on their regular dividends and capital appreciation.
This week’s earnings from ExxonMobil Corp. (NYSE:XOM) should give oil stock shareholders some relief. Not every energy company is going to hold the line in the same way as ExxonMobil.
But long-term investors should have faith. Energy stocks are what I consider “forever hold” stocks. That reason is simple: people will always need oil.
The advantage of holding a world-class energy stock like ExxonMobil becomes evident when oil prices crash . The company’s results were actually rather impressive, all things considered.
ExxonMobil Stock: Cash Flow is King
Fourth-quarter earnings came in at $5.6 billion, backing out extraordinary gains. That was down from $2.8 billion from one year ago. EPS came in at $1.56, down 18%. $5.6 billion in quarterly profits are a heck of a lot of money. Particularly impressive is the company’s operational cash flow, which was $7.45 billion. Exxon has increased it’s capital expenditures or capex 5% amidst the oil crash.
Once again, welcome to the benefits of a world-class oil exploring and production operation. Life is not bad when operations generate billions of dollars. Despite the earnings decline, it’s the cash flow that really matters to companies. That’s particularly true for energy companies, because they must invest in capex and pay a dividend. In this case, ExxonMobil paid out $0.69 per share, a 9.5% increase over the year before.
Alas, being the big Kahuna also means big mistakes can occur. It was impossible to foresee the oil price crash. Unfortunately, the crash for crude oil coincided with ExxonMobil bringing eight massive oil projects online. These new projects took years and tens of billions to develop and bring into product. Yet today, the oil from these projects is worth just $48 per barrel versus more than $100 per barrel just six months ago.
The fact is that this money had to be spent, because the largest explorers also are the largest producers and sellers. So they are on a production treadmill. They must keep sourcing oil, even as it flies off the shelf.
Energy is a Long-Term Game
The good news is that oil prices will rise again. When they do, ExxonMobil will reap the full benefits of the projects. That’s how they maintain competitive advantages over the very long term.
With the latest results in, does it make sense to buy ExxonMobil stock? A lot depends on if you already have energy stocks in your investment portfolio.
Despite the oil crash, ExxonMobil stock is down only 15% from its high. The stock looks to have plenty of technical support at $85 per share. If you already hold ExxonMobil, I wouldn’t buy more at this price. That’s because oil prices are going to be down for awhile and sentiment may shift against XOM. If so, you’ll be able to add exposure to the stock at lower prices.
However, if you don’t own ExxonMobil, now might be a good time to initiate a small position. I would consider adding a fractional position – perhaps 50% of your target allocation. This way, if the price falls further, you can average down and buy more shares of this great company at a cheaper price. Plus, if shares rise, you get to go along for the ride. Among the major oil stocks, ExxonMobil appears to be one of the biggest and safest.
Exxon’s current dividend yield of 3.2% is attractive. But for income investors, there is an even more attractive opportunity. My colleagues – Ian Wyatt and Steve Mauzy – lead our High Yield Wealth investment advisory.
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Cheap Oil Here to Stay – For Now
Crude hasn’t been this cheap since March 11, 2009. And it’s likely to stay low for a while. OPEC refuses to cut production. And US production is expected to increase – not decrease – an additional 600,000 more barrels a day. The Saudis have played this one wrong – and you could profit from their blunder. Top analyst Tyler Laundon’s found what he considers the best way to play this new, cheap oil boom. Click here for all the details.
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