- Canadian Oil Sands halted oil extraction in Syncrude oil sands project.
- Exxon Mobil is well-run and viewed favourably by current investors.
- Investors hope that the oil & gas industry is going through a temporary slump.
- Exxon Mobil hit by reduced demand and overproduction.
- What needs to happen in order to get Exxon stock skyrocketing.
In a surprising move, Canadian Oil Sands halted oil extraction in the Syncrude oil sands project. Exxon Mobil (NYSE:XOM) stock fell from 75.24 to 72.08 (Sep 1 closing price) in the 24 hours following the announcement.
It is worth noting that the Syncrude project was a huge project which involved five other companies. Plus, it produced 263,000 to 293,000 barrels per day. Exxon Mobil investors generally viewed the project as a major longterm investment for Exxon, and one that will ensure a good return on investment. As a result, Exxon stock hasn’t regained its value which was prevailing at the time leading up to the announcement. The news struck like a lightning strike and caused Exxon stock to fall.
The official reason for the decision was a fire which damaged equipment- thereby requiring a halt to production in order to develop a recovery plan. However, it is worth noting that oil sands projects are arguably the most expensive type of projects in the industry. Therefore, the profit margins are tiny and require high oil prices to make business sense. With oil prices at half what they were during the summer of 2014, Exxon Mobil and its partners were literally flushing billions of dollars down the drain.
Interestingly, investors who understand this and other factors have chosen to hold on to their Exxon stocks.
Moreover, oil prices have crashed to a six year low which has pushed countries such as Saudi Arabia to cut oil spending. Furthermore, China’s economic issues caused them to import 13% less crude oil. This hurricane of panic and uncertainty has affected Exxon Mobil stock, and is reflected in the current fluctuations in the stock price.
Fortunately, Exxon Mobil continues to attract investors. Delve into the numbers and you notice that they are a well-run machine. Notably, Exxon Mobil outperforms the rest of the industry in a number of key metrics. For instance, debt to equity ratio sits at 0.20, well-below the Oil and Gas industry range of 0.4 to 0.8. However, revenue is down by a huge 52.3% as compared to the same time last year. Additionally, Exxon Mobil is currently underperforming the rest of the S&P 500. Therefore, they are currently not a good stock to buy.
Exxon Mobil investors are hoping that the oil & gas industry is in the midst of a temporary downturn. They may be right. The huge drop in oil prices is based on a number of factors… a main one being overproduction. As compared to six years ago, oil production in the USA has increased significantly. Therefore, oil from countries such as Nigeria which would usually find a home in America had to be diverted to Asia. This has caused companies to drop prices in order to compete.
Furthermore, increased production of energy efficient cars in response to an increasingly environment responsible world has reduced demand. Moreover, China’s reduction of oil imports has caused a reduction in confidence within the industry. After all, China is the world’s second largest market for oil & gas. Demand going down while production rises causes a perfect storm leading to plummeting prices. Exxon Mobil has been hit particularly hard by this. A move to cut billions of dollars worth of projects is viewed by investors as a show of fear and uncertainty causing investors to move their investment capital elsewhere.
This has proven to be a smart move because quite simply if you have an appetite for oil and gas stock, there are better places to put your money than Exxon Mobil.
In conclusion, the days when Exxon Mobil investors enjoyed a stock price which held steady in the high 84 range are long gone (June 2015). For Exxon Mobil stock to bounce back, a few things will have to happen; China’s economy will have to bounce back, demand for oil & gas will need to go up, and Exxon will need to make business moves to increase investor confidence.