As we all are aware by now, at 2 p.m. EST President Donald Trump will announce his decision on extending waivers on Iranian sanctions as part of the Iran nuclear deal previously signed by President Obama. Oil is likely priced towards the scrapping of the deal, so prices will probably drop further on a surprise extension than they would rise on the scrapping of the deal.
Oil major Exxon Mobil (XOM, Financial) shares could especially benefit from the end of the deal, since Exxon has little to no interest in Iran, unlike other European oil majors like Royal Dutch Shell (RDS.A, Financial), and it is still near 52-week lows. Secondary sanctions would make it very difficult for Iran to sell its oil on global markets, cutting off most of the supply from the rest of the world. Rarely do investors have a chance to capture a 4.26% dividend on a $325 billion megacap, even without imminent potential catalysts.
Keep in mind that Saudi Crown Prince Mohamed bin Salman is clearly aligned with the Trump administration and vice versa. Bin Salman wants sanctions on Iran. That much is obvious, as do many of the hawks in Trump’s cabinet such as National Security Advisor John Bolton and Secretary of State Mike Pompeo. It is hard to see people like these passing up an opportunity to sanction Iran and cut off their oil markets, and it is even hard to see Trump balking at their advice. These officials believe Iran is a threat to the U.S. Whether this is actually true or not, is not the point.
There’s more though. A new development just hit the presses of Yemeni rebels attacking Saudi oil infrastructure. Exxon has nothing to do with this, but instability such as this can only raise prices further, all other things being equal. We also have generally rising inflation and wage growth in the U.S., which will also help oil from the dollar demand side.
Aside from this backdrop, it’s true that Exxon has been underperforming its peers of late. Its top and bottom lines have not risen at the same rate as its oil major peers like Chevron (CVX, Financial), for example, as oil prices have jumped, but being near 52-week lows is something else. There are few 4.26% dividends that are safer than this one long term, and dividends have been hiked 30% since 2014. Chevron’s have only risen 12%. Future dividend hikes for Exxon are also likely long term as interest rates rise and Exxon wants its yield competitive, so for those who get in now, that 4.26% should rise. On top of that, the chances of capital growth from these levels off the back of a still rising oil prices are more likely than not.
While growth may be lagging in comparison to peers, financially the company is in tip top shape and has shown an ability to stay profitable even under extreme stress in oil markets. Keep in mind that for 2016, when oil hit lows of $26 a barrel, Exxon still earned $7.84 billion, and Chevron logged a net loss of half a billion. So even in an environment of lower oil prices, Exxon can outperform from here because it is better structured to handle stress, as it has already demonstrated.
Long-term debt decreased to just $20.8 billion as of its latest quarterly report, having paid down $1.9 billion last quarter. It is now leveraged a miniscule 6.4% of market cap, even at such low share price levels. Even in an environment of much higher interest rates, Exxon Mobil should be financially strong and fundamentally safe.
Finally, not every reason for a lagging share price is a bad one. Some are actually good. For example, Exxon has been very conservative with share buybacks, and management has indicated that future plans are to retain that conservative stance, repurchasing only the amount that would offset the dilution from share-based compensation programs. Share buybacks are cheap thrills for shareholders and are a form of borrowing against the future. Withholding buybacks when they are tempting shows a degree of maturity and long term planning.
Exxon Mobil does not seem to be all that worried about the fact that it is lagging in the capital gains race, and for a megacap, while not exciting, that’s perfectly OK. It has demonstrated patience and financial acumen, which is far more important long term. Buying Exxon should be reflective of the same strategy that its executives are pursuing for the company, which is a long-term one.
Disclosure: Long XOM.
