Despite officially meeting on Monday (this morning), OPEC+ did not wait. Russia had announced weeks ago in March that engaged in an offensive war inside neighboring Ukraine, and struggling with a weakened energy commodity export-reliant economy, the nation would cut oil production by 500K per day from now into year's end.
This previously announced reduction is part of Sunday's news and is not surprising. What did surprise and has to be seen as embarrassing for the Biden administration at this point was the joint announcement made public on Sunday by a group of allied oil producers, led by Saudi Arabia. The Saudis pledged to reduce output by 500K barrels per day as others joined in cutting production.
According to various reports, in addition to Russia and Saudi Arabia, the United Arab Emirates, Iraq, Kuwait, Oman, Algeria, and Kazakhstan will all to different degrees reduce output starting in May that culminates with about 3% of the world's production being voluntarily removed from the marketplace for at least the next seven months. This is on top of previously announced production cuts already made by "OPEC+". For the Saudi's alone, it's a 5% production cut.
What this move does is move what had been a tightly balanced market that had been trending lower ahead of an anticipated slowdown in economic activity both in the U.S. and globally, toward imbalance. Now, demand will likely outstrip supply regardless of overall economic health.
This Is Troubling
We all know that the Biden administration had taken a number of steps early on in the president's term that had curbed U.S. production of fossil fuels in anticipation of eventually transitioning to a "greener" future. What this ultimately did was export the leverage in energy markets to other exporters just as global demand intensified coming out of the pandemic.
We all remember the president, hat in hand, asking the Saudis and other producers to ramp up output to help the U.S. counter rising consumer level inflation. We all remember the rebuttal. We all know that Saudi Arabia had recently gone into business with long-time rival Iran in a deal brokered by mainland China.
Now, we learn through the Financial Times that Riyadh became irritated last week as they had believed that the Biden administration would replenish US strategic reserves as WTI Crude prices came in through $80 and then $70. Instead, Energy Secretary Jennifer Granholm stated that the depleted SPR could take "years" to refill.
Blame both sides. Blame neither, I don't care about politics, but this Sunday's news is quite symbolic of the continued deterioration of US and Saudi relations. The fact that the Saudis have cozied up to China and their long-time rival Iran and in taking this action, will benefit Russian military efforts in Ukraine, has to be seen as sub-optimal at best.
This appears to be an intentional slap in the face, while potentially along with already mentioned adjacent actions taken, potentially be seen as early steps toward moving at least some part of the oil trade away from trading in U.S. dollars and instead in some other reserve currency.
What Can We Do?
As investors. It's easy to see how this places a bid under crude prices. This should bolster full service/production/exploration stocks. Of these, I am long Occidental Petroleum (OXY) , Chevron (CVX) and Exxon Mobil (XOM) . This will also benefit oil services names such as Halliburton (HAL) and Schlumberger (SLB) , and refiners such as Valero (VLO) . I have been long all of these names sporadically over the past two years. At present, as this was a surprise, I came in long just Occidental by virtue of Warren Buffett and Exxon Mobil by virtue of overnight trading.
Those who do not read me every day, will ask about Chevron. I actually gave that one up as the shares hit my panic price on the way down. Yes, they are trading higher now than they were then. Will I stay long OXY? Yes, that was an investment. Will I stay long XOM? Quite possibly. It has been a rare day on Wall Street when I have been flat both Chevron and Exxon and I must admit that since selling CVX, I felt quite naked without at least one of these names in inventory.
About Exxon Mobil
Exxon is expected to report the firm's first quarter financial results in about three weeks. Expectations are for EPS of $2.55 in a range spanning from $2.00 to $3.10 on revenue of $91.2B, which sits in a range spanning from $61B to $99B. The year ago comps would be EPS of $2.07 on revenue of $90.5B, so we are talking about some margin expansion, but small if any revenue growth.
For the past year, Exxon posted incredible free cash flow of $58.39B. Out of that number, the firm paid $14.939B in dividends and repurchased $15.155B worth of stock.
The firm ended fiscal 2022 with a cash position of $29.64B, inventories of $24.435B and current assets of $97.631B. The firm ended the year with current liabilities of $69.045B, of which very little was in debt, leaving its current ratio at a healthy 1.41. Even sans inventories, which while volatile in valuation, are certainly in no danger of being worthless, the firm's quick ratio ended 2022 at 1.06. This still passes muster.
Total assets amount to $369.067B, and to the firm's credit, there was no entry made for any kind of intangible assets whatsoever. Total liabilities less equity came to $166.594B. This includes $39.17B in long-term debt, which is greater than the firm's cash position, but not it's expectations for cash plus free cash flow while still maintaining returns to shareholders at current levels. In addition, the firm has more than $34B in long-term investments on the books in addition to property, plants and equipment, so perhaps more liquid than presented if need be. This balance sheet is in fine shape.
My Thoughts
Obviously, Exxon is coming off of a very strong year. The quarter reported in three weeks may compare to be only modestly improved from a year earlier, but that year was the firm's best in many. In Exxon, as with Chevron, the investor is exposed to exploration, production, US production, transportation, expanded refinery operations, retail... pretty much everything with the exception of oil services.
So, will I hang onto, or even grow this now entry level long position in XOM left over from last night's trading? Very possibly. Readers will see the long-term uptrend still very much intact.
The stock apexed in mid-February and had been on the way down all the way through mid-March. Readers will see that the stock found support twice at the $98 level as both Relative Strength and the daily MACD (Moving Average Convergence Divergence) have come back from very soft levels.
Now, see that thin blue line, which is where the stock closed on Friday. That's the 50-day SMA (simple moving average). It's not magic, but if tested and held, portfolio managers will be forced to increase long-side exposure. This is what happened in early January. That line was taken and held. The stock went up about 10% from there in a few weeks. Then, in very early March, the stock took that line, and then failed to hold it. The stock fell almost 11% after that. The blue line is my key here.
My intention is to hold these shares that I now see trading with a $113 handle. Quick target of $125 just in case the market goes nuts this week. I'll add upon a retest of that blue line, currently $110. I'll panic (It's a term. If it's planned it's not panic.) halfway between the 50 day line and the 200 day line and buy those shares with the intention to repurchase the shares at that red line if it gets that far.
Oh, and did I mention XOM pays shareholders $3.64 per share per year just to stick around? That's a yield of 3.32%. Not quite a three month T-Bill, but sure better than money in the bank, literally.
