Is ExxonMobil Struggling To Remain Stable?
Oil major ExxonMobil (NYSE:XOM) is renowned for its stability and consistent dividend payouts. As its third quarter earnings report, slated for 31 October, draws closer, doubts are gathering on the horizon regarding its ability to sustain consistent increases in dividend payments. Although the oil bigwig has consistently increased dividends over the past 31 consecutive years, its continued exposure to low priced natural gas has greatly affected margins in the recent past.
To digress a bit to provide context, low natural gas pricing in the US contributed heavily toward ExxonMobil’s 57% year-on-year downturn in net income during the second quarter. The record $41 billion acquisition of natural gas company XTO Energy in 2009 has also had a drag on ExxonMobil’s performance through the years. Compared with Chevron (NYSE:CVX), which also has natural gas undertakings, although primarily outside US soil, ExxonMobil’s shares gained 30% since the years of the XTO acquisition while Chevron’s shares clocked gains of 60%. This goes on to reveal the impact that unfavorable natural gas pricing in the US has had on ExxonMobil’s margins.
Despite natural gas seemingly passing by as a sticking point to great margins and perhaps even continued dividends, ExxonMobil is not softening its stance toward natural gas drilling. Will this affect its standing among its legion of truehearted income investors?
Emerging Markets Demand Will Adjust Natural Gas Pricing
A sneak peek into ExxonMobil’s research and development department justifies the oil major’s undeterred efforts in natural gas. In a report published by ExxonMobil earlier in the year titled ‘The Outlook for Energy: a View to 2040 ’, the oil bigwig comprehensively highlights all the global energy demand drivers going forward.
Among these demand drivers, the emergence of a strong middle class in Africa appears to have been given the most prevalence. On average, the world’s GDP is expected to grow at an average annual rate of 2.8% through 2040. ExxonMobil however expects Africa’s average annual GDP to grow 4% over the same period. In addition, Africa’s population is expected to increase by 800 million to an estimated 1.79 billion over the same period. This outburst in population will be accompanied with a similar shoot in energy demand. According to the report, emerging market energy demand will grow 65% through 2040.
Gas Prices Will Adapt To The Economy
ExxonMobil’s report bears many consistencies with other reports which pinpoint Africa as the next pillar of growth in the global economy. How does this play out for ExxonMobil’s natural gas prospects?
Natural gas prices should slowly but progressively adapt to increasing demand from emerging markets. Not only is natural gas cheaper relative to crude oil, but natural gas also has a host of other immediate industrial uses such as plastic manufacturing. As emerging economies continue to develop, they will opt for energy choices that are not only affordable, but present multiple uses that guarantee maximum value for money.
ExxonMobil, being centrally positioned as far as natural gas goes, will pocket huge windfalls on the back of continued economic development in emerging markets. The oil major is a good pick for any investor looking to develop a stable, safe, income generating portfolio.
Disclosure: The author has no position in the stocks mentioned in this article, and does not intend to initiate any position in the next 48 hours.
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