While it’s true that shares of Exxon Mobil Corporation (NYSE/XOM) are currently at their lowest point in a year and look to be making a turnaround after yesterday’s China-fuelled disaster, it doesn’t mean that the company is a good stock pick at the moment.
But the stock went up by nearly four percent yesterday, you say. Don’t be fooled by this small rebound by oil majors.
Analyses of Exxon and its stock performance are lukewarm at best. While there are clear strengths in that it has reasonably solid valuation levels, as well as relatively favorable debt levels and financial position, other indicators signal poor performance in the short to medium term.
Exxon is suffering from a deteriorating net income stream, dwindling profit margins, and poor operational cash flow. The company has underperformed against the S&P 500 quite significantly, and did not exceed that of the Oil, Gas & Consumable Fuels sector. Moreover, Exxon’s net income has declined by 45.7% in comparison with the same time last year, falling from $9.10 billion to $4.94 billion.
Its year-to-date stock performance stands at -23.3%, owing much to the sharp decline in oil prices. It is unlikely to improve this year.
Oil markets are steeped in pessimism. Hedge funds and other investors are shortening their positions on oil, and net-long positions are at their lowest level in five years. Translation: traders are betting en masse on oil not rebounding any time soon.
Bank of America cut its third-quarter West Texas Intermediate (WTI) price forecast to $45.00 per barrel and Brent crude at $50.00 per barrel on Monday, as global energy markets continue to hobble along. Perhaps Citibank’s February prediction of $20.00 oil is not so silly after all.
Market fundamentals clearly still reign supreme, and bearishness in the oil market is well-founded when one considers current global oversupply, slumping demand, China’s stock market crisis, the potential of Iranian exports, and the threat of a Greek exit from the eurozone. WTI is now within $4.00 of touching its March record-low, and the demand to bring that price up is simply not there. Essentially all of the gains made in oil markets since the worst of the January and March slumps have been erased.
But how and when will prices rise, then? Again, we have to look at the fundamentals.
The how is fairly straightforward. Oil majors are delaying approximately $200 billion in 45 major projects worth of investments, which is set to create a “substantial hole in their investment pipeline” according to Wood Mackenzie Ltd.
This unfolding of events will of course have its consequences. There will come a point in the future where adequate oil supply will be at risk, as today’s low prices have ensured that oil majors have little appetite to make new investments. Low oil prices have essentially created the conditions that will ensure a shrinking future supply, which will in turn cause prices to rise.
When this will occur is less certain, but there is one thing you can bet on: it won’t be any time soon. That means oil majors like Exxon are off limits for the time being.