Exxon Mobil Could Deliver Big Dividends in 2016
The oil sector is sneaking back into the rankings, that is from the perspective of the Exxon Mobil Corporation (NYSE:XOM) stock outlook 2016. Owners of Exxon Mobil stock are now entitled to a 10% higher dividend, which like Apple Inc., is payable four times a year. Exxon shareholders received their last dividend on September 10 and before the end of the year, they will receive an additional $0.73 per share (ex-dividend dates being August 11 and November 9, 2011). The stock’s dividend yield exceeds 3.5%.
Dividends are sometimes overlooked, but they are important. Dividends can be described as the portion of profit that a company, such as Exxon Mobil, will distribute in the form of cash to its shareholders. Today, with the uncertainties in the market, which often cause investors to overlook stock fundamentals and potentials, dividends have become more important. Exxon Mobil shareholders, in particular, can gain from the company’s better-than-average dividend policy.
In fact, when it comes to a successful investment strategy, investing in stocks that are stable and that offer high dividends is the first step. It may be time to focus on the major oil companies with a view to long-term investing. Oil, in recent days, has reached $45.00 a barrel, which could be a good excuse to invest in big oil companies, given the ability of the oil market to rebalance.
Exxon Mobil Stock Outlook 2016
Yes, in the short term, oil may continue to fall, as Iran, its oil and all, will be reintegrated into the world economy in 2016. Iran could increase oil production, perhaps weighing down on the perception of oil overproduction, thereby keeping oil prices low. However, Iran needs oil to revive its domestic economy even more so than any other economic consideration. In order for sustainable increases to occur, Iran’s oil infrastructure must be upgraded.
Interest rates will remain anemic for 2016, but the Fed will likely make a nominal increase, which should manage to sustain oil demand at current levels. In fact, if the Fed decides not to raise rates, it could send the message that it fears low economic growth, fueling recessive tendencies in China, which is the world’s largest importer of oil.
As for American shale oil producers, energy prices are too low. To avoid disappearing from the crude oil market, these producers will have to adjust their production ceilings downward. This, combined with demand for crude oil recovering over the next year, even as OPEC could be prompted to cut production, certainly makes an attractive case for the Exxon Mobil stock outlook 2016.
Meanwhile, if the oil price situation fails to improve, Exxon Mobil shareholders can always rely on dividend yields. Indeed, during periods of low prices, petroleum companies look for ways to cut costs and postpone projects. Focusing on cash flow and high dividends allows oil companies to maintain their strong fundamentals.
Exxon Mobil, like many oil majors, has diversified its production capacity by focusing on renewable energy, gas, and refining by ensuring that if the price of oil were to fall, revenues from other divisions would help balance the revenue losses. In addition, Exxon Mobil can rely on a significant chemicals division for that, working on a variety of materials (see below).
As for the Exxon Mobil stock outlook 2016 itself, despite the fall in oil prices, the stock is trading at levels comparable to 2011, when oil was trading far closer to $100.00 a barrel. One of the reasons is that Esso, an Exxon Mobil subsidiary, uses oil as a raw material, transforming it into gasoline, jet fuel, diesel fuel, and other products. Thanks to its global presence, Esso has generated robust earnings on the back of rising European refining margins. As a result, in the second quarter of this year, Exxon Mobil earned $1.5 billion in profit, up from $795 million in the same period last year. (Source: “Exxon Mobil earnings fall 52 percent,” Fuel Fix, July 31, 2015.)
After two difficult years that saw owners of XOM stock having to forego their dividends, which the company had suspended for a few quarters, stockholders can share in Jimmy Cliff’s relief, as they, too, can see clearly now—and will see even clearer in 2016. However, the imbalances in the refining market remain, with a drop in European consumption of petroleum products on one side and an abundant supply from the United States, the Middle East, and Asia on the other. As a result, many refineries have closed their doors.
Had Exxon Mobil not had to contend with heavy repair and maintenance charges that added to the company’s costs, while limiting the total amount of profit-generating activities the company was able to do, its stock would have performed much better. (Source: “Refinery Woes Stall Gasoline Price Drops,” The Wall Street Journal, August 23, 2015.) Presumably, in the next quarters, owners of XOM stock will benefit from the completion of maintenance operations at key facilities.
Despite maintenance costs, Exxon Mobil has also upgraded facilities, adapting to the new situation and adjusting its product mix in accordance to the market. Thus, the production of diesel, for which demand is still high, has increased, while the company’s logistics have been optimized to reduce costs. The company’s stock has already had a relatively great run since the start of 2015, considering the price of crude oil. This good fortune should continue well into 2016, given the better prospects for oil prices.
This Could Be Big for Exxon Mobil in 2016
Oil prices have fallen for a number of reasons, but three of these are sufficient for an overall picture, affirming the favorable Exxon Mobil stock outlook 2016:
- The European economy has suffered many blows and spread crises, involving the “PIGS” economies (Portugal, Italy, Greece, and Spain) vis-à-vis Germany. The PIGS designation shadows the fact that other major EU powers, like France, have also not experienced satisfactory growth since the 2008–2009 financial crisis. Meanwhile, even economic miracles have a best before date.
- China’s economic growth has been steadily dropping and after double-digit growth until a few years ago, economists have re-evaluated expectations from 7.7% to 7.0% or less per year. Other emerging countries, especially the “BRICS” nations (Brazil, Russia, India, China, and South Africa) have also experienced stunted growth. Brazil, for example, has had a terrible year, and not just because of the Petrobras–Workers’ Party scandal. Not surprisingly, this all-around economic malaise has caused global oil demand to drop and by a significant amount. Current demand is estimated at one million barrels per day, compared to two to three million barrels per day prior.
- In recent years, extraction technologies have enjoyed tremendous progress, thanks also to Exxon Mobil, especially where shale oil and oil sands in North America are concerned. At a price near $70.00 per barrel or more, shale rock resources, of which there are many, are profitable, becoming actual reserves. Production has therefore increased rapidly over the past few years. If oil prices were at $70.00 per barrel, production of shale would only expand; indeed, other countries would start to produce, given the return on investment.
The low oil prices have helped to discourage shale investment, such that despite its potential, shale production amounts to some five million barrels per day, representing approximately 5.5% of the world’s total production. Iraq, meanwhile, has started to come back on tap, returning to the markets with a potential to increase production using traditional techniques.
Even Saudi Arabia, which has been the only country having the financial reserves to sustain the low prices resulting from the perception of greater oil supply, other oil producing countries, OPEC and non, such as Venezuela, Iran, and Russia, have little room to adjust. They are forced to produce at low prices, wasting resources that might be better saved for a more favorable seller’s market.
In 2016, investment in oil production could drop, unless prices rise and stabilize, giving oil companies a better long-term perspective. It can take as long as five years for an investment in an oil project to reach fruition, that is production, meaning that there will be a shortage of supply soon enough, as fewer new projects are being launched. Oil fields that remain to be discovered, thus requiring exploration, take even longer. On average, it takes eight to 10 years to go from discovery into production.
Sooner rather than later, oil prices should stabilize at around $60.00–$70.00 per barrel for a few years, until global demand becomes stronger and another peak toward $100.00 per barrel is possible, as producers, which have not invested in new projects at present, will have to rush to meet the growing demand. In this respect, Exxon Mobil has continued to invest in new projects while upgrading its downstream capacity, meaning the Exxon Mobil stock outlook 2016, already in a strong position now, has gushing potential.
How Exxon Mobil Can Profit from Geopolitical Risks (i.e. ISIS)
All the above reasoning is purely economic and does not take into account any geopolitical problems. There are geopolitical risks, however, that may create strong tensions on the markets. What would happen, for example, if Iran believed Saudi Arabia were responsible for orchestrating the drop in oil prices? Other countries like Iraq and Russia may be in big trouble. How will they react as an international alliance to defeat ISIS builds?
Exxon Mobil is the largest integrated company for oil and gas in the world and in the second quarter, revenues exceeded expectations, although earnings were below Wall Street estimates. Merrill Lynch is very positive on energy, given the strength of a giant like Exxon. Moreover, there is Exxon’s chemical division to consider, which in the past, has played a significant role. Indeed, the chemical business is the component that could support the value of Exxon stock, a component that many on Wall Street fail to appreciate, even if chemicals account for some 16% of total revenue.
Mobil is the Exxon Mobil unit most involved in chemical engineering and lubricants account for much of the research and production in this area. Mobil is a world leader in the development of synthetic motor oils and the company’s famous Mobil-1 brand is well known among both regular motorists and performance drivers on the NASCAR circuit.
Mobil also makes synthetic oils for heavy-duty diesel applications, combining advanced engine protection and fuel consumption reductions. Diesel powerplants dominate commercial and industrial applications and Mobil’s synthetic oil is used in a wide range of commercial vehicles, including road transport, mining, shipbuilding, and agriculture. Then there are the special oils for specific mechanical components, such as transmissions. Mobil is working on lithium-based complex greases, which improve service life, offer extra-high performance, and are suitable for a wide range of applications and operating conditions, thereby sustaining the positive Exxon Mobil stock outlook 2016.
Investors Should Watch This in 2016
One of the factors that hurt Exxon Mobil in 2015 was the loss of about a billion dollars as the U.S.-based oil giant was forced to relinquish a deal with Russia’s Rosneft because of intensifying U.S. sanctions on Russia. (Source: “Exxon Mobil admits $1bn lost from anti-Russia sanctions,” RT News, February 27, 2015.)
Before the White House intensified political pressure on Russia, Exxon was involved in a joint venture with Rosneft, a Russian state-owned company for offshore exploration and drilling in the Arctic, as well as projects to extract crude oil from the Siberian hinterland, all of which had to be abandoned to adapt to the Western sanctions.
The former joint venture focused on the Kara Sea, off the northern coast of Russia, in which Rosneft said it had found oil, estimating the field to contain some 87 billion barrels of crude. However, as the United States and Europe have been drawn back to the Russian sphere in the wake of the effort to defeat the Islamic State (ISIS), Washington and Brussels are well aware that securing Russian support will entail easing or scrapping sanctions altogether, expectedly boosting Exxon stock.
Obama and Putin have already sat at the same table at the G-20 summit in Turkey, but while the White House will be unwilling to lose face on the matter of Ukraine, in which it has become heavily invested, Russia sees international issues as being interconnected. This means that Russia will not cooperate with the West unless the West promises an easing of sanctions.
Europe, for that matter, would rather Russia have no sanctions at all, seeing as these have hurt the EU economy even more than they have hurt Russia itself. Therefore, the current situation calls for the EU and the U.S. to review its approach to Russia, leading to a process that can only benefit Exxon stock over the course of 2016.
The current crisis in the “Old Continent,” highlighted by the ISIS bombings in Paris on November 13, has only reinforced the need to resume full relations with Russia. The Middle East has helped the West understand that as long as the world’s greatest security threats remain rooted in countries like Syria or Iraq, it cannot ignore, much less isolate, Russia.
Moreover, the situation in Ukraine could stabilize over the next two to three years, which will certainly offer the basis for all NATO members to ease Russia’s isolation. Exxon stock has already absorbed the shock of the company’s forced withdrawal from its Rosneft cooperation; any opportunities to return to Russia will only contribute to the Exxon Mobil stock outlook 2016 performance.
Indeed, one way that that Russian diplomatic re-integration might be achieved is through a strong diplomatic push for all concerned parties (Russia, Ukraine, and various militias fighting on either side) to implement the Minsk agreement by early 2016 with the excuse of building a large multipolar anti-ISIS coalition. (Source: “Global Anti-ISIS Alliance Begins to Emerge,” The Wall Street Journal, November 17, 2015.)