Prepared by Chris
We recently started buying in the most-hated sector in the market right now, which of course is energy. In fact, we are approaching overweight as we have been buying heavily in the last two weeks. Sure, demand is poor right now. Supply is ample. It is not going to turn around tomorrow, but for the medium to long term, in the mid-$30 range, we believe that Exxon Mobil (XOM) is a strong buy.
Make no mistake about it. Exxon Mobil has survived every major downturn in energy and emerged stronger each time. While pricing impacts revenues, expect Capex spending to focus on bringing new projects on-line, but these can be cut and done so dramatically if the situation worsens. With this flexibility, as we move forward, we expect substantial improvement in all segments, as oil prices have stabilized and started to rebound.
Investors will be further paid a 10% dividend yield at these levels, though that could be cut, which might be viewed favorably by the market. XOM is staring at a huge cash crunch as bets on rising demand sour, which will force the company to cut jobs and may put its dividend in jeopardy. That said, winter is coming fast, even though fall hasn’t hit yet, we are seeing SOME demand rising with back to work/school, more cars on the road, snow and cold weather already hitting parts of the US. Oil has fallen far and taken energy with it. We think you need to capitalize.
Naturally, the price of oil and gas is what pretty much drives revenue for the company, in addition to changes in volumes. As energy commodity prices move higher, Exxon Mobil makes more money. With that said, revenues have begun to fall this year along with energy prices.