How Exxon’s Bad Year Impacts Other Majors

You can't help but look at the diving stock market averages this week - and the follow-up rallies - when you're looking at oil and oil stocks. In the oil world, we don't live in a vacuum, and any major move in the indexes will obviously affect oil as well.

But as oil investors, these are the most important points to consider: The stock market gyrations almost perfectly coincided with the start of oil earnings reports from the majors for the 4th quarter of 2017. Concurrently, the dollar set off on a technical rally higher from very low levels. Both of these factors added to the dropping S&P's negative effect on oil stocks - just as it seemed that the energy sector was going to deliver some well-deserved 'catch-up' gains compared to the rest of the market.

Instead, it seems like our patience will again be tested with oil stocks.

But we must remember that fundamentals remain firmly in place - continued re-balancing of global stockpiles, adherence to OPEC/Russian production limits and huge global demand growth. All of these factors cannot be denied and lead one to consider this dip in oil stock prices to be just another terrific opportunity to buy.

The 4th quarter reporting of the Majors this week added to our possibilities:

Exxon-Mobil (XOM) is the largest and by far the most watched of the mega-cap majors. And there is no other way to say it, but their 4Q report really stunk up the joint. What can't be missed is their lower production from a year ago despite rallying oil prices, and even more horribly, weak returns from refining in the midst of an enormous shortage of diesel and other refined products in the latter half of 2017.

Yeeech.

In response, the CEO promised a "new plan" for production in his March analysts meeting, but we already know what that plan is - A $5B dollar spend on Permian acreage - to enter a shale play that's unarguably hot - but also unarguably outrageously expensive now.

We wrote and waited for Exxon to use enormous cash stockpiles in 2015 to buy distressed shale assets, or even make a play to buy out a big independent like Pioneer Natural Resources, Anadarko, or EOG Resources. But that move never came.

Instead, Exxon will now pay $40,000 - $50,000 an acre for decent Permian acreage instead of the $15,000 an acre they could have paid in 2015. Exxon has quickly become the poster child for bad timing in the oil industry, with their mistimed buy of XTO Energy at the absolute top of the natural gas market in 2010, and their 2012 Rosneft arctic Russian deal that ran into the U.S. sanctions buzz saw.

The current Exxon disaster has run like a disease throughout the rest of the majors, cratering shares of Chevron, Shell, Conoco, BP and Total along with Exxon-Mobil.

But not all of them are as dumb as Exxon - NOT HARDLY.

There is a silver lining in the Exxon disaster - with other majors who are not only well positioned to take advantage of the oil renaissance that's happening today - but paying super safe and clean dividends to boot; and they are almost all in Europe, with Shell and Total. Shell's buy of Chesapeake acreage in 2012 and their JV with Anadarko gives them value acreage in shale. But they also made a perfectly timed deal to buy BG Group near the lows of 2016. Add to that Ben van Beurden's forward thinking view on renewables and you've got a company that continues to correctly time markets and do everything that Exxon seemingly cannot do any longer. Total is also finding quality resources in areas outside of the hot U.S. unconventional space, but no less exciting. Their recent push in Guyana is an indication of their innovation in finding quality assets at value prices.

And both are paying big dividends: 5.3 percent for Total, 5.7 percent for Shell.

Both of these are tremendous opportunities to take advantage of Exxon's horror quarter, combined with the (hopefully) temporary dip in the stock market and rally of the dollar. And both are worthy of investment with great capital appreciation upside, without much real risk.