There was a time not so long ago when Big Oil was considered to be a very safe investment. The thinking was that large oil companies will always make lots of money because there is a limited supply of petroleum and a growing demand.
That is no longer the case even Warren Buffett has dumped some of his oil stocks; including Exxon-Mobil (NYSE: XOM) the world’s largest producer. Overproduction, a glutted market and an oil prices that seem to know no bottom are scaring many investors into following Buffett’s lead.
Are they right? Is big oil now a fundamentally unstable investment because of falling prices? Disturbingly there are some financial numbers out there that support that hypothesis.
Most troubling is Exxon-Mobil’s revenues; which have fallen by $207.21 billion (€184.27 billion) over the past two years. Exxon Mobil reported revenues of $440.76 billion (€391.96 billion) in June 2014 that fell to $336.14 billion in June 2015 and $233.55 billion (€298.92 billion) in June 2016. Those numbers indicate that Exxon-Mobil’s revenues have dropped by $100 billion (€88.93 billion) a year for the past two years.
Chevron is Operating at a Loss
Not surprisingly, the revenue collapse has begun to affect Exxon-Mobil’s bottom line. In June 2014, Exxon-Mobil reported a net income of $34.1 billion (€30.32 billion); that fell to $23.77 billion (€21.14 billion) in June 2015 and $10.53 billion (€9.36 billion) in June 2016. Over two-thirds of Exxon-Mobil’s revenues have disappeared in just two years.
The frightening thing is that Exxon-Mobil is actually in far better shape than another oil giant; Chevron (NYSE: CVX). Instead of a net income, Chevron reported a loss of -$746 million (€663.41 million) on June 30, 2016. As recently, June 2014, Chevron reported a net income of $20.06 billion (€17.84 billion) .
What’s truly disturbing is that Chevron is in better shape than the Brazilian oil giant Petrobras (NYSE: PBR); which reported a net income of -$10.7 billion (€9.52 billion) on June 30, 2016. To add insult to injury, Petrobras’s stock was trading at close to junk levels on September 12, 2016; it had a share price of $9.76 (€8.68) despite revenues of $83.64 billion (€74.38 billion).
One has to wonder if Petrobras’s current situation is the future of companies like Exxon-Mobil and Chevron. Will we see those stocks trading at prices as low as those at Petrobras? It is certainly possible if the revenue collapse continues.
Speculators Find Oil
Speculators are certainly considering such instability, Petrobras’s stock has more than doubled in price over the course of the year. It was trading at $3.95 a share back on January 6, 2016.
Exxon-Mobil has seen similar gains it was trading at $72.69 (€64.64) a share on September 11, 2016, and $87.27 (€77.61) a share on September 12, 2016. As recently as July 15, 2016, Exxon-Mobil hit a high of $95.12 (€84.67) a share. This gave Exxon-Mobil owners a return on equity of 6.14% the problem is that return seems to come from speculation not an actual increase in value.
Strangely enough Chevron has been trading at a fairly high price despite its lack of income. Chevron reached a price of $102.05 (€90.75) a share on September 12, 2016. It was trading at $75.79 (€67.40) a share a year earlier on September 11, 2015.
That increase came in spite of a negative profit margin of -5.02%, a free cash flow of -$1.938 billion (€1.72 billion), and a diluted-earnings-per share number of -.39. Investors also received a -.49% return on equity from Chevron.
Chevron in particular proves that big oil is no longer a safe investment. Some of the companies are suffering massive losses; that indicate their business model may no longer be sustainable. A strong possibility is that Chevron will either collapse or sell itself to some other company; such as Exxon-Mobil to avoid the death spiral.
The World has Turned Upside Down
Big oil is no longer a safe investment, speculators’ interest in it; and the unrealistic prices some petroleum stocks are trading at, make it all the more dangerous. Smart investors should stay away from oil for the foreseeable future, the commodity is simply too unstable for companies in the field to be a value investment.
Investors seeking safety and high returns will have to look to unfamiliar territory. That includes tech stocks like Apple (NASDAQ: AAPL), Berkshire Hathaway (NYSE: BRK.A) already has by purchasing 15.2 million shares of the tech icon over the past year.
The world it seems has turned upside down, oil is no longer a safe and stable investment but tech is. Investors will have to learn to live with this new reality if they want to make money.