King of fossil fuels
Exxon Mobil Corporation (NYSE:XOM) is the number one producer of natural gas in the U.S. Oil is still the major concern, and I think recent issues regarding oil will open a window for oil stocks. Nothing says buy this than short-term declines in a key commodity and a round of short-sighted downgrades based on that decline. It is absurd that a reactionary downgrade due to a decline in the share price of a company causes further decline in the share price. Once the winds change, opportunity exists. This is oversimplifying the matter as Exxon does have a couple of problems related to growth, which I see as more of a price of oil problem though most cite volumes as well.
Exxon Mobil Corporation (NYSE:XOM) is not even the kind of company that you look at for the short-term. Even a year is too fast for a turnaround. You should look to the three-year picture. Demand might be minimal right now because the economy is not growing as fast as most would like, but that does not mean it will stay that way. The stock might be headed lower in the near-term, which should send the PE even lower. Exxon has a huge net income of $45 billion, but it is no secret how profitable oil companies are.
Oil might not have the best outlook, but natural gas seems to be on the rise. That should help Exxon Mobil Corporation (NYSE:XOM). It is still primarily an oil company. The reason I think it should be watched is because there is a chance to pit the short-term against the long-term. Where do you see the price of oil in five years? Well, in the mean time, Exxon Mobil Corporation (NYSE:XOM) is still making a ton of money and has a dividend yield of 2.90% at current prices, so once the stock is low enough, it is definitely a buy. Hopefully, the bad news will continue to flow for a bit longer to give a solid entry.
Natural gas companies diversify
Exxon is facing pressure on concerns about oil. Concerns about natural gas have led Linn Energy LLC (NASDAQ:LINE) to acquire Berry Petroleum. Linn Energy LLC (NASDAQ:LINE) has been flat for two years. It had positive earnings for most of the time, but has slipped into the red recently. The share price has not reacted. When it does start moving I think it will be a very impressive move. My instincts are telling me that the direction will be up, but there is no way of knowing. Diversity provides stability, but not while the secondary business is very small. Even for Exxon Mobil Corporation (NYSE:XOM), natural gas is a small part of it despite it being the leader. Oil is king there.
Even though I want Linn to do something other than hover around $38, it is understandable. Linn Energy LLC (NASDAQ:LINE) is a dividend stock with a dividend yield over 8%. That is not bad. Natural gas is headed up, and getting that dividend in the mean time is not bad. There are a lot of factors that could squeeze the price of natural gas upwards. There are a ton of production facilities going online, and the push to natural gas in the U.S. is gaining steam. However, it is not certain that the move to natural gas is imminent. Linn Energy LLC (NASDAQ:LINE) is now about 50% natural gas and 50% oil. It actually leans more towards oil plus natural gas liquids, but the minutiae is not important. Linn Energy LLC (NASDAQ:LINE) is diversity.
I was considering Chevron Corporation (NYSE:CVX), but it did not make me that excited. Instead, we head to the natural gas staple Chesapeake Energy Corporation (NYSE:CHK). I like the hard luck cases, and Chesapeake has been beaten up quite a bit. Consistently low natural gas prices weigh on the company and it has decided to go into oil. Oil is not that bad, but I like the idea of flipping a U-Turn into a flooded street. Perhaps, you can get Chesapeake Energy Corporation (NYSE:CHK) even cheaper.
The company just needs to get itself together and start making money, which does not seem like a large imposition since that is its job. The company is in the midst of a regime change, but I am not sure the price will go lower. If I were to take a position, I might do it by going short puts at $17 or $18. The company has $33 million in cash against $13.5 billion in long-term debt, both those numbers went the wrong way between December 2012 and March 2013. It’s debt-to-equity is below 1, but that much of a difference between cash and long-term debt when the company is posting losses is a concern, though revenue improved in the most recent quarter.
I like the macroeconomic picture over the next few years, but the company itself needs some work done. Selling puts is a great way to hold your place in line, and since the price is above $19 now, you can pocket the premium and just wait. If you decide you dislike the company, you can close your position. You might have some premium left over or have to pay a little extra, which is not a problem.
Conclusion
Only Linn Energy LLC (NASDAQ:LINE) is ready to be bought here, and its dividend will smooth out any issues. I know the market has been hitting a rough patch, but Linn does not have a history of moving too much. Chesapeake Energy Corporation (NYSE:CHK) may be at the bottom, but there is no way to know and it is better to wait for the current bad news to work itself out. It would be great if profitable Exxon Mobil Corporation (NYSE:XOM) was hit with a round of downgrades, then it would be the time to get a position. Pick Linn and one of the other too, not all three, though do more research on Linn as well. I like the dividend yield and it has a lot of pros in my book.
The article Oil Companies Are Diversifying originally appeared on Fool.com and is written by Nihar Patel.
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