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Unless you are following geopolitical strife with great regularity, you may have missed a big kick in the head that ExxonMobil (NYSE: XOM) received over the past year.
The venerable oil explorer and producer set up a joint venture with Russian state-owned oil driller Rosneft, a $70 billion behemoth that accounts for some 40% of state revenues.
Exxon had bought up an enormous amount of real estate in Russia, and had planned to begin drilling in several locations. The Arctic was one of these areas, a location where oil had only been theorized to exist until its presence was recently confirmed.
The deal was complex, because Rosneft got part of ExxonMobil real estate in Alaska, the Gulf of Mexico and various U.S. shale fields. Exxon owns 30% of the Sakhalin Island oil fields, as well as four other locations totaling more than 63 million acres. Those are now all commingled assets.
Alas, the West hit Russia with economic sanctions because of the unrest in Ukraine. Those sanctions include a prohibition on U.S. companies doing business with Russian oil and gas drillers.
ExxonMobil reported in its 10-K filing that this little hiccup would cost the company $1 billion. The company cannot collect revenues from these locations while sanctions remain in place. The Arctic deals went away, but Rosneft gets to explore the region anyway.
The Russian oil sanctions come at a particularly bad time considering that oil prices have plummeted, which affects ExxonMobil’s top line.
So what’s the play here for investors?
Investors need to keep the big picture in mind with respect to ExxonMobil. It is a legendary powerhouse oil explorer and producer. It isn’t going away. This too shall pass.
A billion dollar loss is a bummer, but the company made $35 billion in net income last year, so let’s not cry a river. It also generated $12 billion in free cash flow, which is typical for the company.
The way I see it, eventually sanctions get lifted and the project continues. Russia will find some way to juice the deal so that ExxonMobil doesn’t end up too disadvantaged. It’s a mutually beneficial deal, so Rosneft doesn’t want to anger its U.S. counterpart.
The stock is 20% off its high, and the loss has already been factored into the stock price. I just don’t see it having much of an effect going forward. ExxonMobil also has a solid balance sheet and plenty of room to fund its 3.3% dividend, so there’s no concern there.
It’s the low price of oil that’s of greater concern. So I would suggest that if you own ExxonMobil, I would hold off buying more at the current price. That’s because oil prices are going to be down for a while and sentiment may shift against the stock. If it does, you’ll be able to add exposure to the stock at lower prices.
However, if you don’t own ExxonMobil, now may just be a good time to open up a position. I might consider adding a half position, something like 50% of your target allocation. This way, if the price falls further, you can average down and buy more shares of this great company at a cheaper price.
Cheap Oil Here to Stay – For Now
Crude hasn’t been this cheap since March 11, 2009. And it’s likely to stay low for a while. OPEC refuses to cut production. And US production is expected to increase – not decrease – an additional 600,000 more barrels a day. The Saudis have played this one wrong – and you could profit from their blunder.
Top analyst Tyler Laundon’s found what he considers the best way to play this new, cheap oil boom.