Everything is pointing toward higher energy prices in the next several years.
First, there's supply and demand.
Worldwide demand for energy is increasing. In fact, the Outlook for Energy estimates that global demand for energy will soar +35% from 2005 to 2030. The increase will be fueled by growing industrialization and higher living standards in emerging markets. For example, China overtook the United States as the world's largest automobile market in 2009, with sales of 13.6 million cars and is expected to purchase 100 million vehicles by 2020.
While demand for energy is increasing, the supply of oil is dwindling. In the U.S., domestic production of oil peaked in 1970 at about 9.5 million barrels of oil a day and declined to about 5.1 million by 2006. Currently, the planet is estimated to have 1.3 trillion barrels of proven reserves — only enough for 40 years at current consumption rates, but current consumption is all but certain to increase.
Then, there's the falling dollar.
Oil and other forms of energy are denominated in dollars when they are traded, so their price increases as the dollar weakens. As the U.S. continues to wrack-up unprecedented amounts of debt, many forecast that the U.S. dollar will lose value in the months and years ahead.
We recently had a preview of the effect of rising demand and a falling dollar on oil prices. Industrialization exploded in emerging markets during the past decade and the U.S. Dollar Index (an index of the U.S. dollar measured against a basket of the world's currencies) plunged more than -40%, from 120 in 2002 to under 71 by 2008. Consequently, the price of a barrel of oil increased from less than $20 in 2002 to greater than $140 by 2008.
In short, energy prices seem perfectly situated to rise significantly in the years ahead.
Who will benefit?
ExxonMobil Corporation (NYSE: XOM) is the largest publically traded company in America and the world's largest public oil and gas company. The company explores, produces and refines oil and gas all over the world. It operates facilities or markets products in most of the world's countries, searches for energy on six continents, and is the world's largest refiner.
The world is frantically searching for more oil in increasingly hard to reach places, such as miles under the sea and from rock and sand. In addition, the search for and development of alternatives to oil such as natural gas, coal, nuclear, wind and solar continue in haste. ExxonMobil, with its far-ranging geographical diversity, expertise and deep pockets is perhaps the world's most able company to meet the task.
This goliath has 80 billion barrels of oil equivalent in a diverse resource base that includes conventional oil, liquid natural gas (LNG), unconventional oil and gas (sources that are difficult to harvest using conventional drilling techniques) and oil sands. The company has more than 130 production projects in virtually every corner of the world and generated more than $300 billion in revenue in 2009.
While 2009 year end reserves consisted of 62% oil, Exxon continues to diversify its asset base and position itself to benefit as the world moves toward cleaner burning fuel. In June of this year, ExxonMobil purchased Houston-based XTO Energy in a $41 billion deal. XTO's portfolio consists of vast reserves of natural gas primarily from unconventional resource basins in the United States.
Why buy it now?
The stock has already started moving. It's up +18% in the past three months. Third quarter earnings were fantastic, as profits soared +55% higher than the year ago quarter. The company benefited from higher overall volume of +11%, driven by a +49.5% boost in natural gas volume primarily due to the XTO acquisition. Refining volume also nearly quadrupled from the year ago levels as demand for specialty chemicals has increased in the recovery.
Exxon's sheer size enables it to operate at lower costs and higher margins than most of its competitors. In addition, resource nationalism is becoming more common as many emerging market countries are reluctant to let private companies exploit their resources. Instead, they seek partners, of which Exxon, with its huge resources and 100 years of expertise, is a likely choice.
Action to Take –> While smaller energy companies may ultimately provide higher returns in the months and years ahead, they can be a wild ride as energy prices rise and fall. Exxon, however, can whether rocky times in this unpredictable industry. What better way to make sure you capitalize on the powerful long term trends than with the biggest and the best? At 12 times earnings, Exxon still sells below the industry average and can be purchased at current prices.
– Tom Hutchinson
Tom has a 15-year history as a financial advisor with UBS constructing investment portfolios. Tom's background includes a NASD Series 7 and 63 certifications.