Recent effervescence in the Middle East continues to push up oil prices. Last Friday, oil prices opened above 2012’s peak ($107.52), getting ever closer to 2011’s high point ($112.3) –the highest price since the Great Recession. Hence, investing on a worldwide oil and gas leader with integrated operations like Exxon Mobil Corporation (NYSE:XOM) seems appealing. For example, an analyst argues that an investor should reap the rewards of Exxon Mobil Corporation’s dividend for the long run, and enjoy a 54% total return on initial investment. I disagree.
Stock price for Exxon Mobil Corporation (NYSE:XOM) has been falling amid higher oil prices.
So, if all remains the same we have to factor in declining prices, meaning the expected 54% total return on initial investment will be eaten away by declining prices. I mean, the analyst is not thinking on holding on to the stock for ever, and will have to eventually sell it. My point is that an $87,000 initial investment for five years at ceteris paribus will give a total return of $40,000 on dividend payments. But, the loss provoked by stock depreciation at the time of selling is being ignored. Hence, the investor may want to remain of the sidelines until price reaches bottom at the end of the cycle before taking a strong position.
When looking at performance, indicators are generally strong, but there are some worrying signs. For example, cash volumes have stagnated while management plans to continue dividend payments and rose capital investment for the next five years. The strategy, however, is dependent on high commodity prices, which are in turn dependent of higher tensions in the Middle East. And, with countries increasing protection of oil reserves, expansion opportunities are ever less common. In other words, the cash volume for the capital investment strategy depends on a military action in Syria that will spark regional tensions raising fears of limited supplies.
Analysts feeling bullish about the oil and gas industry are assuming that a military action against Syria will be carried out. Also, bulls assume the event will trigger regional instability putting oil and gas supplies at a greater risk, and pushing prices up. What analysts ignore here is the reach of the action. Syria is not Iraq: it will not be occupied (intervention is not a synonym for occupation), it is a much smaller oil producer, and poses a smaller risk to regional stability. However, uncertainty over the oil industry remains as the G-20 summit comes to an end with no definitive plan of action. Speculation over the action that will be carried out against Syria is what causes the price to move up and down, generating insecurity about future investments on Exxon Mobil Corporation (NYSE:XOM) and making its stock price drop.
Disclosure: Jodor Jalit holds no position in any stocks mentioned