ExxonMobil

The dirty business of oil & gas

For many, 2019 was a year of rethinking. Greta Thunberg and other climate activists are calling for a drastic shift toward more sustainability and environmental awareness. There's no question that we urgently need to act - better yesterday than today! But our climate policy thinks far too short-term and not sustainably enough. The coal phase-out will take a few more years, and renewable energy sources are still nowhere near able to cover current demand. And that demand will keep merrily rising in the future. So what should we do?

Microsoft founder Bill Gates dreams of green and safe nuclear energy. But that will also take a while. Especially since nuclear power is hated by many because of the many dramatic accidents. For ExxonMobil and many other energy experts, it's clear: over the next decades, global demand for oil and gas will keep rising. Even if the business is dirty, we probably won't get by without it - a welcome opportunity for dividend junkies.

The origins and business model of ExxonMobil Corp.

The story and legendary rise of today's ExxonMobil Corporation begins in 1839 with the birth of John Davison Rockefeller. He grew up in a poor family. His father William Avery Rockefeller left the family and traveled the country as an herbal doctor and charlatan. When John was 16 years old, he started working at the shipping company Hewitt & Tuttle. At first he only helped out there as a bookkeeper, but later got a permanent position thanks to his thirst for knowledge and initiative. In 1858 he got a job offer from Maurice B. Clark, who wanted to build a brokerage and commission business in Cleveland together with him and another partner. But when Rockefeller heard that Edwin L. Drake had finally struck oil successfully in Titusville, Pennsylvania in 1859, he quickly knew that this would become his new main business.

But since Rockefeller was no fan of gambling - and searching for oil was nothing else - he grabbed the clever chemist Samuel Andrews and made sure crude oil was processed better. His process wasted significantly less oil than competing refineries. To sell his kerosene (a distillate of petroleum) across the whole country, Rockefeller even made his own barrels and handled the shipping himself. Business was great, and his company Rockefeller, Andrews & Flagler was soon able to open more refineries and buy up competitors. However, since the highly flammable kerosene often caused devastating fires, demand unfortunately dropped again. To counter this, Rockefeller reorganized his company in 1870. The Standard Oil Company was born, and with practical oil lamps, which of course needed his product, demand rose rapidly. For a long time railroad companies shipped his oil, but when they got too greedy for his taste, Rockefeller started building his own pipeline.

At its peak, the Standard Oil Company controlled around 70 percent of the world kerosene market. The government under Theodore Roosevelt wanted to break up monopolies, and so Rockefeller's company also met its fate in 1911 after a lengthy court case. The big oil company was broken up into 34 independent companies. As a result, the share prices collapsed enormously. For Rockefeller this was his chance - he bought huge blocks of shares in his companies. When oil demand rose to previously unimaginable levels during World War I and with the invention of the automobile, and the shares followed suit, John D. Rockefeller became the world's first dollar billionaire.

Okay, but how did the ExxonMobil Corporation come out of that? Well, that's explained pretty quickly - ExxonMobil is a merger of 2 of the 34 companies of the former Standard Oil Company. Standard Oil of New Jersey (abbreviated SO - pronounced EssO) became the Exxon Corporation. And the Standard Oil Company of New York (abbreviated Socony) later developed into the Mobil Oil Corporation. Due to changes in the law, the two companies were able to reunite in 1999. Today ExxonMobil is still one of the most successful companies in the industry and is also one of the most profitable corporations in the world. In its upstream and downstream business it produces and markets oil and natural gas. It also offers various chemical services and end products.

How will ExxonMobil's business fare in the future?

If you look at the long-term development of the oil price, you quickly notice that it collapsed massively in 2014/2015. Even though it has since been able to form a stable bottom and has even risen slightly, it's still nowhere near the level of 2013. Of course, companies like ExxonMobil and Royal Dutch Shell are heavily dependent on the oil price. But you have to admit that ExxonMobil was easily able to weather this downturn with only a few scratches. On the contrary: at the low point, the oil major was able to cheaply buy up a few companies that had gone bust. So it is emerging from the crisis stronger.

Through various investment programs, the company is trying to make itself more and more independent of the oil price. It invests mainly in the upstream business - here production volume is to be increased to 5 million barrels per day by 2025. ExxonMobil also wants to significantly increase its results in the downstream and chemical business. For this, additional and more modern refineries are to be built or existing refineries expanded. For example, a new plastics processing plant in Baytown costing almost 2 billion US dollars is set to go into operation in 2022. In addition, the company is trying to expand its downstream activities abroad.

Sustainability is becoming more and more important, especially to the younger generation. You really have to admit that Shell has positioned itself in a much more exemplary way here in recent years. But in its home country, ExxonMobil also didn't have it as hard on this point as Shell and other European energy companies. They clearly felt the pressure from politicians and environmental activists. In America, where probably the best-known climate change denier is currently in power, sustainability isn't yet given as much importance as it really should be. Nevertheless, ExxonMobil's executives naturally have sustainability on the agenda too.

And what about the dividend?

Here ExxonMobil is completely convincing. Shareholders have been receiving a profit distribution since as early as 1882. And it has been raised every year since 1981. On average over the last 10 years, the dividend was raised by around 7.8 percent per year. So the company is one of the coveted Dividend Aristocrats. Currently there's a dividend yield of 4.95 percent. Since profit dropped somewhat recently, the payout ratio is currently 99.7%. But don't worry: ExxonMobil still has a cash reserve & profit should rise again in the following years.

Conclusion:
ExxonMobil is a broadly positioned oil and natural gas company that will surely still benefit from rising energy demand over the next decades. Even though today we'd all love to banish the environmental sinners, we're still dependent on them for now. And once the time comes when our needs can be covered by sustainable energy, ExxonMobil will surely come around the corner and buy up those companies. As with Bank of Montreal last week, it's especially income-oriented dividend hunters who benefit from an investment here.