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Bill Zettler

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Summary

  • The future is bright for financially stable oil companies like Exxon.
  • The ESG phenomena further reduces competition.
  • BP’s own research shows oil will be a huge part of energy delivery for at least the next 20 years.
  • ICE (Internal Combustion Engine) vehicles will also grow through 2040.
  • Plastics production is projected to increase by 500% by 2050.

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Exxon (XOM) has been in the news a lot lately. It was dropped out of the Dow, rumors of a dividend cut are rampant and ESG (Environmental, Social and Governance criteria) seem to dominate the energy conversation and not in a good way for oil companies like Exxon.

I have recently written about Exxon’s dividend “Exxon Mobil: Buy Now – Who Cares About The Dividend” and “Exxon Mobil: I Told You To Sell At $88, Now I’m Telling You To Buy At $48“. Obviously, with that latter article, I was a bit too early but the points made in both articles are even more compelling now.

In this article, I will discuss Exxon’s prospects in the face of the New Green Deal onslaught that everyone seems to be caught up in.

Here are 6 reasons why the New Green Deal will have little effect on Exxon for the next 10-20 years.

1. The future is bright for financially stable oil companies like Exxon

The COVID-19 pandemic has caused an enormous hit on oil companies. With the oil price briefly falling below zero in April, new production ground to a halt.

Source: Trading Economics

The price has slightly recovered to the low $40’s area but is still a long way from the $60 plus price before the pandemic.

This has caused a record number of bankruptcies in the oil industry as seen here from the Dallas law firm Haynes and Boone. The number of importance to Exxon’s future is the debt write-offs totaling more than $175 billion.

Why is this important to Exxon’s future? Because each of those bankrupt companies making up that $175 billion is either out of business permanently or at an extremely reduced production rate. This has reduced competition for Exxon.

In addition, bankruptcies will allow the financially stable Exxon to pick up productive assets for pennies on the dollar.

Advantage Exxon.

2. The ESG phenomena further reduces competition

Many oil companies are moving towards renewable energy products and away from oil. The two most notable are BP (BP), Italy’s Eni (E), and Shell (RDS.A).

Shell (RDS.A, RDS.B) is jumping on the bandwagon of its European rivals BP (NYSE:BP) and Eni (NYSE:E), which have both announced plans to reduce their focus on oil and gas in the coming decade and build new low-carbon businesses. Source: Seeking Alpha

Russia’s Rosneft thinks this is an existential crisis and oil prices are going to go up.

I think that to go away from your core business, which is what they are doing, somebody will need to step in… somebody will need to take that responsibility,” Rosneft’s Didier Casimiro told the Financial Times Commodities Global Summit. “It is an existential threat for supply. It is an existential threat for price volatility… we will have a [supply] crunch, price volatility, and yes higher prices.”

BP, Eni, and Shell are only the most notable, others are taking similar steps.

Advantage: Exxon.

3. BP’s own research shows oil will be a huge part of energy delivery for at least the next 20 years

BP has been keeping statistics on oil markets since 1850. They generate a usage projection every year that is used by many organizations including the UN to plan for future energy sources.

Note that in 2020 BP projects an increase in fossil fuels both in 2030 and in 2040.

More oil and gas usage and less competition mean higher prices.

Advantage Exxon.

4. ICE (Internal Combustion Engine) vehicles will also grow through 2040

According to the IEA (International Energy Agency), ICE vehicles will increase at least thru 2040. This will be driven mostly by third world countries as their economic growth accelerates faster than their ability to handle electric vehicles.

It will be a long time, maybe forever, before a Tesla Super Charging station will be in Zimbabwe, but rest assured there will be many more ICE vehicles in Zimbabwe 10 and 20 years from now.

It doesn’t matter if you sell gasoline in California or Africa, it’s still a sale.

Advantage Exxon.

5. Plastics production is projected to increase by 500% by 2050

The UN says plastic production should grow roughly 500% by 2050 to 1,500 million tons from about 300 million tons in 2018. Exxon is the 3rd largest plastic producer in the world.

More plastic means more oil.

Source: UN

Advantage Exxon.

6. It’s a commodity stupid – low prices now beget high prices later

With all the wailing and gnashing of teeth, it is easy to forget that oil is just another commodity. It just happens to be a more emotional commodity than say copper but the same rules always apply. When prices get too low, investment slows or ends and supply eventually diminishes enough to result in prices going up enough to justify more investment to meet the increase in demand.

As we have shown here it sure doesn’t look like demand is going to decrease between now and 2030 or even 2040. However, it does appear that competition is decreasing meaning more profits for those companies that stay the course over time. That would be Exxon among others.

We have seen similar actions during the last 3 recessions as shown here in this oil price chart. Once COVID is past us, demand will pick up substantially and Exxon, one of the last-men-standing, will benefit mightily.

J.P. Morgan thinks oil might hit $190 in 2025 during an oil “supercycle”.

“The combination of the supply and demand side dynamics suggests that the global oil market could move into large and sustained deficits past 2022, reaching an extreme 1.7 mbd by 2025. Running this scenario through our pricing model suggests these balances would lead to Brent oil prices rising steadily from 2022 onwards, averaging around $80/bbl in 2023, $100/bbl in 2024 and $190/bbl in 2025.”

Conclusion:

The Green New Deal is part myth and part fantasy. It considers only what elite North Americans and Europeans think about energy use over the coming decades.

But in the rest of the world, the need for cheap energy sources is existential and they don’t care what rich people in the western world think. They know the cheapest energy sources are the only way poor 3rd world countries can pull themselves out from decades even centuries of extreme poverty.

And those energy sources include massive amounts of oil and natural gas.

To emphasize this point, the EPA and others have put together a map showing the potential for wind and solar. It is easy to see huge areas that will not have renewables for a long time, if ever. Maybe when hydrogen and mini-nuclear plants are available but probably not before that.

Notice the vast majority of the planet is “unsuitable”. These areas will continue to require ever-larger amounts of petroleum (and coal) to advance their economies.

So with all the above points, it is obvious that a financially strong oil company like Exxon has a long and profitable future ahead of it.

Be politically incorrect and make some long term profits – buy Exxon.

Exxon is a strong, long-term buy.

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Author: Bill Zettler

Source: Fool: Exxon Vs. Green New Deal: Buy Exxon If You Have A 5, 10 Or Even 20-Year Plan

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