I don’t feel badly for Exxon Mobil (NYSE-XOM), and you shouldn’t, either. Despite a tremendous $9.4 billion dollar profit in Q3, the world’s largest publicly-traded energy concern is struggling to keep margins from compressing in this historical bull market.
I think we’re approaching the nadir of this great bull market for oil stocks. One after the other, the world’s largest oil companies are reporting lower margins for their refining operations as labor costs soar, governments increase oil-based taxes and lease rates for drilling continue to hit all-time highs. Combined, these formidable obstacles are compressing profit margins over the last 12 months and the numbers are getting worse.
Exxon-Mobil is not alone. Chevron, ENI SpA of Italy, Total-Fina of France, Royal Dutch Shell and British Petroleum, to name just a few majors, are all in the same boat. As oil prices approach record prices in nominal terms this fall, refining margins have shrunk. Demand for refined products like gasoline has declined this year, forcing oil companies to reduce their gas prices to remain competitive.
The above 12-month chart for Exxon Mobil is starting to look toppy. Over the last four weeks the stock declined from its record high despite a sharply higher crude oil price. It’s the same story for the other majors, all looking exhausted at this point.
The oil services group, which has order-backlogs for the next several years amid the biggest bull market for rigs and oil-equipment services, is also looking tired. This sector, however, unlike the oil majors, is still at the onset of a mergers and acquisitions boom over the next few years as high lease rates and soaring stock-market values make mergers economically feasible.
Though I’m still bullish on some oil majors, mainly in Russia, and the oil equipment sector, I would not put new money into these areas now. I’ve been long and strong both areas for a long time, courtesy of my Commodity Trend Alert (CTA) since 2001.
One of the biggest problems facing large-cap global oil stocks this year and beyond is the growing government tax-grab on Black Gold or crude oil. Increasingly, more governments, including the province of Alberta in Canada, the United States, Russia and many emerging market countries want a greater slice of the oil-pie. That means more stress on oil company margins, in addition to weak refining margins and surging input costs.
The next big thing in the energy complex won’t be riding junior oil stocks or small-cap oil services companies.
The next secular trend lies in alternative energy or cleaner-burning sources of energy like windmills, solar and nuclear power. Though this ship has definitely left the harbor over the last 24 months as a new viable investment theme, alternative energy will fetch a much higher premium over the next decade and beyond as the world goes even greener and oil supplies tighten further.
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