Shareholders Forgotten in Big Oil’s Profits Gusher
Past 50 years or so, I can’t ever recall being overweighted in oils. Too big and stodgy for my tastes. Their cash flow goes for oil discovery and building out new oil fields. No dividend largesse or arresting share buyback programs put in place.
Exxon Mobil, biggest of the big, doubled earnings past 12 months, but its shareholders just got some small change. The stock has doubled on rising oil quotes. XOM is my biggest position in the energy sector where I am nearly double weighted. Living within its cash flow, I’d lump XOM with other well heeled properties like Procter & Gamble and Coca-Cola. This is not a Ford, General Motors or a big bank that, cycle over cycle can plunge themselves into bankruptcy.
Meanwhile, high profile tech houses repeatedly get over-extend valuations and see their earnings and stock price get crushed. Exxon raised its dividends pennies per share while earnings rose dollars per share. Meta, Alphabet, Amazon, Tesla and Netflix are the walking wounded today, not Exxon which has doubled earnings past 12 months.
This accounts for the stock's double. Curiously, high metabolic overachievers have avoided energy which was a layup past 12 months. I can’t find XOM anywhere in their portfolios, but plenty of Meta and Amazon.
Exxon did nothing proactive to double its stock price except pump out its productioin while oil futures were doubling. No new semiconductor plants, black boxes or cloud computer services. Pumping out oil continuously, you would think management would double capital expenditures and buy back stock, doing all that proactive managements do with cash flow gushers but XOM’s executive floor remains hushed in contrast to even Microsoft with soft demand in all divisions. XOM, even after doubling still sells at 10 times latest 12 month earnings power let oil futures hang in and the stock performs.
Exxon sold at $30 only two years ago. Before that, the stock spent several years around $70 a share, largely influenced by oil futures. Quotes dropped into low sixties then, now at $88 after breaking par months ago. Such a roulette wheel can’t be outguessed. Too many variables involved.
Lest we forget, Exxon is basically domiciled in the U.S. but, the lion’s share of its earnings and capital spending take place abroad. Schlumberger just changed its name to SLB, its stock market symbol. This seems a subtle move to Americanize or at least be less French. Offshore drilling and exploration is bound to surge in the rising profitability state of crude oil, Go Halliburton! Commodity speculation is back, even for ragamuffins.
SLB( pronounced “slob”)can’t help but do better, but I’m allergic to its high valuation. Consider, Exxon doubled but still sells at 10 times my estimate of current earnings power. Admittedly, $100 crude oil quotes may not last but I’ll take my chances. Tech houses like Microsoft show 5 dollar down days. Looks like tech is repeating its correction of overvaluation like in 1999 - 2000. My rule of thumb is if you are paying more than 1.5 times the market’s multiplier you’re already late to the game.
Conversely, if you own a commodity play early in its cycle, hang in. And yet, management like Exxon should be ashamed to throw its shareholders just a couple of pennies. Call this the WASP shuffle. Shareholders come last, and corporate frugality first. Nonsense!
When my old buddy Joe Rosenberg joined Larry Tisch at Loews, late sixties, they argued over whether Joe could order a paint job for his office. Tisch never lost his frugal mindset, but knew how to give away his fortune as well. He sold CBS and bought Diamond Offshore Drilling when it was a buyers market at 10 times earnings, misunderstood and neglected by the Street.
But you can’t just own value stocks because they look cheap. What’s known as a value trap. Sectors like the coal industry got hosed years ago while Sears Roebuck drifted into desuetude. Catching the bottom of the high yield market is a goal I’ve set myself, but it’s not around the corner. I piled into 2-year Treasuries where I’m down serious money.
My hero was Sam Walton whose inventory control was state of the art. Before Sam made a store visit, he’d pull out the employee roster and memorize names. Walton’s achievement was he took a prosaic business, discount retailing, and turned it into a smoothly run powerhouse.
Sears delivered as much but then lost its edge when Julius Rosenwald retired. I ran the family’s equity investments then, and they listened when I told them to peel off Sears stock then selling at 30 times earnings, an extreme case of overvaluation.
Decade over decade, I’d lump Exxon Mobil in the stodgy stock category. It’s too well healed and highly unlikely, ever to get into a financial press like General Motors, Ford, even a bank like Citigroup in a bad cycle they found themselves in financial quicksand. XOM is no Berkshire Hathaway Buffett reinvested cash reserves. Occidental Petroleum, so far so good. I own as much OXY as XOM.
XOM is a free cash flow machine today, but its capital spending still holds in the $5 billion quarterly range. Earnings have doubled, but they raised their dividend by 3.4%, just pennies, I feel very overweighted in energy. But, I am not ready for other GDP stocks, and technology plays, still seem too pricey.
I still love ragamuffins and own airlines, American, Delta and United Airlines. These are “show me “ kind of stocks which so far are managing through a tough economic cycle, labor unrest and shortage of equipment.
Jokingly, Ted Turner once told me that if he could raise the capital he’d look to buy the Atlantic and Pacific ocean. My kind of guy. I have no ideas about the headman at Exxon Mobile, but he should read up about Turner and learn to bet a bunch.
LARGE CAP TECHNOLOGY PRICE TO EARNINGS
RELATIVE TO THE S&P 500
This chart on technology sector valuation shows its broad range from even valuation with this market to 2 times market valuation. Considering the commodity nature of Exxon’s business and its niggardly dividend payout, XOM won’t sell at the market's valuation still in the high teens and pricey.
I am still married to energy paper, some 30% of my assets, 15% at cost. Very overweighted in MLP‘s like Enterprise Products Partners, Williams Companies, Occidental Petroleum is a major holding along with Exxon. Value stocks do bury you as as readily as growthies. A stock selling at 10 times earnings can sell at 8 times earnings as well. Banks can sell at discounts to book value. I cringe when I hear the phrase “hard book value.”