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Strategies & Market Trends : Dino's Bar & Grill -- Ignore unavailable to you. Want to Upgrade?

To: Goose94 who wrote (11118)	1/13/2015 8:34:03 AM
From: Goose94	Read Replies (2) \| Respond to of 203353

The Crash In Oil Prices Offers The Opportunity Of A Lifetime - I Beg To Differ There have been several articles written as of late touting that Exxon Mobil (XOM-NY) currently offers the opportunity of a lifetime for savvy dividend growth investors. With the stock down a mere 8% over the past 6 months while oil has dropped over 50%, something has got to give. I surmise it will most likely be Exxon's share price and dividend distributions. In the following article I will make my case as to why dividend growth investors may want to take a wait and see approach regarding the stock. A much better entry point may lie ahead. Current Chart(click to enlarge) (Source: finviz.com) Every boom ends in a bustI have lived in San Antonio, Texas for the last 45 years. During this time I have seen many boom and bust cycles in the oil patch. In fact, I was selling limited liability partnership units in oil and gas ventures as a registered FINRA securities representative during the last oil boom/bust cycle in 2008/2009. My major take away from that experience was the fact that when oil was charging higher to over $100 a barrel, the peak oil theory was all you heard. Then, once the price broke and fell from $150 to $36, everyone was saying the peak oil theory was all a sham created by speculators. The fact of the matter is it did, but it took its toll on Exxon Mobil's stock before it was all said and done. Current Boom/Bust Cycle(click to enlarge) (Source: CNBC.com) What happened the last time?The last time oil prices took a nose dive to $36 in late 2008 Exxon Mobil's stock was trading for approximately $80. 2008 Oil Price Crash(click to enlarge) (Source: eia.gov) Exxon Mobil's stock performance following price dropAfter the sharp drop off in the price of oil in late 2008, Exxon Mobil's stock took nearly two years to hit a low of $57. (click to enlarge) (Source: Scottrade.com) I will be the first to say no two times are ever the same. The truly scary part is... I think this time may be much worse. Things are much different now than they were at that time. Last time the drop was blamed on oil and gas speculation. This time it has to do with an increase in supply coupled with waning demand across the globe. Oil production will take time to subsideThe following information is an amalgamation of one on one interviews with my oil and gas contacts. Shale plays will take time to wind down Many pundits are stating that the shale plays can wind down operations very quickly, but this is somewhat of a misnomer. Yes, shale plays can wind down quickly, but there are two things stopping production from slowing immediately. First, no one wants to be the first to do so. Second, there is a back log of wells bought and paid for waiting only on completion. My contacts state it could be possibly six months before we actually see a significant drop in production. Russia, Iran, and Venezuela have to keep pumping Saudi Arabia is playing hard ball. Recently, Iran and Venezuela tried and failed to get Saudi Arabia to lower production. The problem for Russia, Iran, and Venezuela is these countries may have to actually increase production as oil prices drop to make up for the lost revenues. These countries depend on oil and gas revenues to pay their bills. With Saudi Arabia coming out Monday and stating oil will never rise above $100 ever again, I don't think we are anywhere near a bottom presently. Exxon Mobil's stock is highly correlated to the price of oilHistorically, Exxon Mobil's stock has been highly correlated to the price of oil. Exxon Mobil compared to oil(click to enlarge) (Source: cnbc.com) The fact lost on most pundits is the drastic pace of oil's plunge. The price of oil has dropped so fast none of the bad news related to the drop has had a chance to manifest itself. I posit the next two quarters for Exxon Mobil and Chevron (CVX-NY) will be fraught with uncertainty. I can't imagine a scenario where the company's management will paint a rosy picture. It would not be prudent. At some point things will turn around, yet my sense that is a long time off. How in the world can this be construed as a positive? There may be an unprecedented dividend growth opportunity at some pointThe extreme velocity in the drop in the price of oil has caught many investors off guard. According to my contacts, the price will remain depressed for at least the next six months. The worst case scenario stated was possibly up to 18 months. The current drop in the price of oil seems significantly worse than the last time as well. With Exxon's stock price dropping 30% over a two year period then, I see the possibility of the stock dropping into the $50's within the next several quarters as very real. The drop in the price of oil may create the dividend growth opportunity of a lifetime in Exxon Mobil's stock, but not for quite some time I suspect. The lure of the current 3% yield may be offset drastically by a steep decline in share price over the next few quarters. ConclusionTaking all things into consideration, I believe Exxon Mobil's stock represents a hold at this time. If you own the stock now, hold on to it. As Rex Tillerson stated, Exxon Mobil can weather $40 oil, but he didn't say the stock price would remain at $90 did he? Final Thought If you are looking to start a position in the stock, I would take a wait and see approach. If you absolutely have to start a position now, I suggest at the very least scaling in over the next six months to reduce risk. We have officially entered uncharted waters in my book and any purchase at this time amounts to pure speculation. I look forward to hearing your thoughts on the subject.