Exxon's Fairy Tale

 | Dec 16, 2013 | 12:27 PM EST
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How in heaven's name can ExxonMobil (XOM), one of the world's largest companies trade like a small-capitalization company? How did that happen?

First, Exxon's a changed company. After not growing much at all for the last seven years, it is suddenly possible that in 2014 this company will show 5% production growth, something I point out in "Get Rich Carefully" that is the single most important indicator of where an oil stock is going to trade -- not earnings ,but production growth.

Second, Exxon's been ignored for years, as we have focused far more on domestic plays because they have more growth or because they have been able to capitalize on the refining spreads to make more money. Remember that a refiner can buy crude from the Midwest at a substantial discount to the rest of the world, because the crude is pretty landlocked, and then sell it as gasoline for a price set by the world, which is a heck of a lot higher than what they buy the oil for and far more than it used to be because of how much oil we have discovered here. They can get away with that pricing because our refiners can sell gasoline to the highest bidder and that's what keeps prices higher than you would expect.

That's terrific for Exxon, which is a gigantic refiner.

Plus, Exxon has finally put the overpay of natural gas company XTO behind them, and you know they have because the company has become an unabashed bull for gasoline, not other fuels (whether they be electricity or natural gas), as their brand new ad campaign shows.

The third reason for the buying is Warren Buffett's decision to make this one of his biggest buys ever. The anointing of a stock by Buffett is still the single-biggest spur to buying other than if there is a material transaction that has occurred to a company. Right or wrong, his buying causes a change in mindset.

It's kind of like "The Hunger Games." This is the first of the trilogy, now we are in the "Catching Fire" stage.

Within that "Catching Fire" analogy comes Goldman Sachs' huge upgrade of the stock, signaling it's back and it is bigger than ever. The essence of the upgrade is that Exxon has more growth for a cheaper historic price.

Now, you would think that an upgrade of this variety, a tad prosaic I must add, wouldn't have all that much impact. You would be wrong, and one of the reasons you would be wrong is that Exxon has retired a gigantic amount of stock in the last few years. In 2008 it has 5.22 billion shares outstanding. Now it has 4.33 billion shares out there. That's just a gigantic amount of stock that's gone.

One of my theses about the stock market is that there is a developing stock shortage (not overall, because we have had a ton of IPO issuance), but because of these buybacks. The Washington Post today has an excellent piece pointing out that the market has seen $754 billion in stock disappear this year, less than the $863 billion that was crunched in 2007. But this buying back of stock has been going on right through the recession.

At the same time the pools of capital that want allocation to the stock market have increased and if interest rates start to go higher, I think the influx of new capital will just drive the Exxons of the world higher in 2014 (the "Mockingjay" phase of the "Hunger Games" rally).

So, we have a moment where Exxon, a stock that no one thought could be budged no matter what, a stock that had fallen so out of favor that we looked at lesser-run companies and passed over this one rather quickly, become a darling and, given how inexpensive it is, my take is the run's not done.

Never thought it could happen, but in this market pretty much anything seems to be happening, like it is some sort of fairy tale that each day surprises you with something new.

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