Exxon Mobil – Is Good News Priced In? Bull/Bear Thesis With David Alton Clark And Callum Turcan

Summary:

• Is good news already priced into Exxon Mobil?
• David Alton Clark, The Winter Warrior Investor, explains why he’s bearish on the stock.
• Callum Turcan lays out his bullish case on XOM – it appears to be moderately undervalued using discounted free cash flow analysis.

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Transcript

Rena Sherbill: Okay, happy to have you on, Callum Turcan and David Alton Clark, who runs The Winter Warrior Investor investing group. Callum and David, it’s great to have you on talking Exxon Mobil (NYSE:XOM). Thanks for joining us.

David Alton Clark: Thank you.

Callum Turcan: Good to be here.

RS: Callum, I’d love to start with you if you could lay out for our audience your bullish thesis for Exxon.

CT: So, ExxonMobil, they’re from 2020 to 2022, you kind of have like a normalized free cash flow of about $30 billion to $31 billion. 2020 would be an example of a bust. 2021 example of like a middle of the road situation. 2022, example of a very good year for Exxon. So within those 3 years, you could argue that you have a good normalized free cash flow. And if you look at what ExxonMobil has done with those free cash flows, it’s paid down a bunch of its debt. It’s bought a lot of its stock, and it’s maintained its dividend payout and marginally increased it.

So my bull thesis is basically, the stock appears to be moderately undervalued using discounted free cash flow analysis. It’s a cash flow generating powerhouse with lot of growth opportunities, and its balance sheet has improved immensely in the past few years. I think from the end of 2017 to the end of March 2023, it’s paid down over $30 billion of net debt. So, strong balance sheet, free cash flow generating cow, very shareholder friendly. That would be my – the summary of my bull thesis.

RS: All right David, I’ll follow-up, what’s your thesis and why are you bearish on the stock?

DAC: Well, I understand what Callum is saying about how Exxon’s gone from being at the bottom of the barrel in March of 2020. The stock is up basically 200% over the last 3 years. So pretty much the top line issue I have for the thesis is the fact that everything Callum has said is already priced into the stock. It’s up 200%, but yet over the past year it’s down 5%. And it’s bounced off of, I believe Callum’s price target is like $122. And the price is — I think it was $105 yesterday. I think it’s dropped 2% or 3% today. It’s in the $102 range. But it’s tried, it’s attempted several times this year to break above the $120 level, and it just can’t. It can’t do it.

And there’s several reasons for that, there’s just so many different reasons. One is that, like I said previously, all the good news is priced in. And when you get to a certain point, like, if you take Callum’s price target of $122 and the price of $105 whatever it is just now, that’s only about a 15% bump from where we are right now.

And on top of that – I don’t know if you guys have ever played the game of Jenga. But Jenga’s where they — you’ve got like 34 blocks or something, and you start-off by pulling one out and putting it onto the top. And in the very beginning of the game, it’s super easy to be right and not be too worried about the whole pile toppling over because it’s strong and it’s just you’re just getting started. But when you get 200% to the highest point of the Jenga game, that’s when it gets really risky, and there’s a big chance that the entire stack is going to come tumbling down.

And so investing is counterintuitive where you want to invest when everyone else is negative on the stock. That was back in March of 2020, when I bought the stock at $35, it was a 10% yield and everyone hated it. It was going to – Exxon was going to go under — we were in the middle of the pandemic. Nobody was driving, it was the worst time in the world to invest. I think oil actually went negative per barrel. So they couldn’t even — they were paying people to take barrels of oil at the time that I bought the stock. And then now it’s 200% higher and it’s bouncing up against the upper edge and a lot of what Callum says in his last couple of articles are pretty much right. ExxonMobil has done a great job over the last few years repairing its balance sheet.

But as far as the price to free cash flow valuation, it’s kind of tipped to the downside due to the fact that the refinery profits have dropped off drastically. So, in my latest article, what I was saying was is that, ExxonMobil is fine, but this isn’t the time to buy ExxonMobil. There’s other stocks, other oil and energy stocks in the sector that have much better upside opportunities and higher yields.

Like, I think there was three recent downgrades of ExxonMobil by JPMorgan, Mizuho and Goldman, all kind of making the same point that I’ve been talking about in my articles. JPMorgan is concerned about the refining margins falling considerably, and on top of the challenging tough economic backdrop, that’s another thing. You got to consider where we are as far as in the economic cycle. There’s this long awaited recession that hasn’t come to fruition yet, but seems like it — more likely than not, we’re going to have some type of a pullback here in the next coming months.

So you might get a much better opportunity to buy into ExxonMobil than you have right now. And Mizuho was the same thing with the refiners, and then Goldman actually downgraded them based on the fact that all of the good news is priced in with a 7% free cash flow yield on 2024 estimates of oil. So, I’ve got a lot of other points as well, but I’ll just pass it back over to Callum again. So I think I’ve talked quite a bit so far.

CT: Well, maybe just a little maybe a trivia thing, where you talked about WTI going negative. One of the reasons why that happened is in America, you have to take physical delivery of all — trading oil futures. West Texas Intermediate is based on supplies to Cushing, Oklahoma, you have to take physical delivery of it. So, it went negative because basically, you had to pay people to drive, like semi-trucks with pools in the back to just dump crude into those, where Brent it’s all pay for futures. That was just some trivia thing where you wrapped it up, but March of 2020 things were quite dire.

And then the one I like about ExxonMobil is its commitment to investors because it’s a volatile game, commodity markets. I mean, fundamentally, ExxonMobil’s performance is based on factors outside of its control. So, if you — I mean, they’re selling it — basically they’re price takers, not price makers. So, if you assume that recession is going to happen, commodity companies are not going to be your number one investments opportunity.

But I think that America, Europe, and China, will narrowly avoid a recession, largely because the official unemployment rates in Europe and America remain quite low. And America’s official unemployment rate is less than 4%. People are complaining a lot about inflation, I mean we see prices of things going up, but they’re still employed. They’re still making money. And credit card delinquencies have ticked up, but they’re not — we don’t see the kind of delinquency rates we’ve seen, like, during the great financial crisis.

So, I buy or my bullish view on Exxon comes down to I think, though politically and how –like the households are coming under a lot of stress, but we will like narrowly avoid a recession, in part because of things like the Inflation Reduction Act really is just additional fiscal stimulus and the infrastructure act, delay additional fiscal stimulus. So America’s federal government is continuing to pump a lot of money into the economy. The private sector is still quite strong even with interest rates on the rise. And with Exxon, the crack spreads, refining margins they aren’t what they were in the aftermath of the Russian invasion of Ukraine.

I mean in 2022, refineries were making – like crack spreads were north of $20 a barrel. It was — they were doing quite well, but what matters most for ExxonMobil is it’s upstream segment. It’s all about the oil and gas production and the trajectory of oil and gas production. And ExxonMobil, it’s a powerhouse in the Permian Basin.

Its asset is in Guyana, which is a small country in the northern part of South America. I mean, they found over 11 billion barrels of recoverable oil in Guyana. ExxonMobil owns 45% of that venture along with Hess Corporation and CNOOC (CEO), a Chinese company. And ExxonMobil’s — its major growth drivers will be the Permian Basin in Guyana. As its oil production in these regions continues to grow, so too will its cash flows that are keeping oil prices constant.

So I think what I like about ExxonMobil is gaining exposure to a tried and true unconventional play and this emerging oil export like powerhouse in South America because unlike, if you look at the production sharing contracts in OPEC nations, oil companies, they’re recovering their operating costs and getting like $2 a barrel. If you operate in Iraq, it’s the Iraq National Oil company that’s keeping most of those profits. ExxonMobil, BP, Chinese state majors, state run majors, they’re just getting a little cut of that. But if you are a powerhouse in Canada, America, and Guyana, you get to keep a large chunk of those profits.

So ExxonMobil has an attractive upstream asset base, and that is what I’m most focused on. Like, it’s downstream based their refineries to petrochemical plants because they have only a modest amount of exposure to Europe relatively speaking. They have lot of plants in America and Southeast Asia. They’re better positioned than European majors, but when you look at ExxonMobil’s outlook, basically it’s upstream outlook is now finally promising, like, they were having problems boosting their production than the 2010’s decade, their output of oil and gas, like, marginally shrunk. But now because of the Permian Basins of Guyana and because of their exposure to Tanzania’s emerging LNG markets, their oil and gas production outlook is quite promising.

So if you look at the net debt reduction, I was talking about during my intro, $30 billion of net debt reduction, helps reduce their annual interest expenses. They’re also shaving $9 billion in costs off their operating expenses, largely through layoffs, corporate consolidation. So by the end of this year, their operating costs should be $9 billion lower on an annual basis compared to 2019 levels, and they’ve already achieved most of their savings. So, I like ExxonMobil because at a constant oil and gas pricing outlook, they should be able to steadily increase their earnings and cash flows through stronger — reduced operating costs, reduced financing costs, and oil and gas production growth in attractive regions.

But I will concede that the downstream outlook is — it’s not as promising as it was because you’ll never be able to replicate 2022 in terms of, like crack spreads, you’re more than tripling overnight, and that’s a black swan, once in a life event. I will pass it back to my colleague, David.

DAC: Yeah. I agree with a lot of what you said there. Like I said before, why do you think ExxonMobil is up 200% over the last 3 years? Pretty much everything you just said is already priced into the stock, and that’s why it’s kind of stalled out at this point. And one of the other – one thing I want to make sure and say is like, from being a securities broker, one of the things we always had to do was, figure out the suitability of investors.

So, I want to say that I’m not making a blanket sell call on ExxonMobil for everybody out there. Everyone has their own objectives. A lot of people bought into ExxonMobil, when it was at its low in March, and they got a 10% yield. They’re retired, already maybe above 70 years old and they’re not really trading or making a lot of changes in their portfolios at this point in time. So for someone like that that’s — I’m not telling that person, you need to sell out.

But for me at $60, when I bought like about a $100,000 worth of ExxonMobil at $35, and then it shoots all the way up to $110, I’m still in that phase where I am trying to build my income retirement portfolio. So taking profits at the top where I’m up 200% and redeploying them into other stocks that I feel have a better opportunity for upside and a higher yield, like a 10% yield or, like several different ones that I bought for the service, that was a decision to make where you can increase your income and stocks on the way.

Even if you’re in a tax favorable account and you have a 200% gain, on a 10% stock that’s 20 years worth of income you’ve collected in a 3 years time. That was one of the points I made to the people in my service. And so it’s kinds of hard not to take advantage of that. And then I redeployed half of the proceeds into some midstream MLPs, which have higher dividend yields in the 10% range.

And then I redeployed the other half into some of the E&P oil stocks that don’t have the disadvantage that ExxonMobil has. Like Callum said, ExxonMobil is a mega cap major integrated oil and gas company. So it’s kind of like, conglomerate like GE used to be where it’s great. The E&P side looks promising, but then, okay, now the refining side, the downstream side is down. So, it kind of tampers the ability for ExxonMobil to become profitable.

And then as far as on valuation basis, that was what a lot of — I think it was Mizuho that calculated that they were pretty much topped out where they are. And also on a price to book valuation on trailing two months and on forward, right now ExxonMobil is trading like almost 50% above where the whole rest of the sector is, and so that’s one of the other points I was making is that, it’s all priced in there. The good news, and that there is so many other oil and gas energy plays out there that have taken a much bigger hit, have much — returned a lot more of the cash flow to shareholders, like 50% to 75% ExxonMobil right now, they’ve got a pretty much anemic dividend yield of 3.5.

So those people that bought back in March, and they have secured a 10% yield, that’s great. But if you’re looking for income right now, ExxonMobil is not the one for you. Even if, you know, in Callum’s last article, he was talking about it’s a great dividend growth play, but their dividend growth over the last 5 years has been less than 3%, so it’s been pretty in need. They haven’t – that’s been a big complaint of a lot of the shareholders recently is that ExxonMobil isn’t increasing the dividend as much as the cash flow is increasing. And so what’s happened is, on a dividend basis, anybody that’s looking for income, ExxonMobil, the 5 year average dividend yield is 5.25%. And for ExxonMobil to get back to its 5 year average, it would have to drop to $70 from $105 or $102 wherever it is today to hit that 5.2%.

So, I think it’s lost its luster a little bit for people who are focused on income, and that’s primarily been the cohort that invests in Exxon. Not very many people have been involved in Exxon for the upside potential. But like I said about the Jenga game, if you’re — we’re already at $105, if it’s going to top out at $122 because of future oil prices, outlook and that was one thing that Callum, I think you just mentioned is as long as there’s a stable oil price outlook into the future, and a lot of the big oil men here in Texas, will tell you that no one can predict the price of oil.

Everybody already thought oil, like even the great — the guy from Goldman Sachs was saying oil was going to be a $140 this year, and he said – he peeled back his estimates, like, two or three different times now, I believe he’s under $100. And even the Saudi oil minister said, no one knows the future price of oil except for Allah. So I don’t put a whole lot of faith in the price of someone predicting what the price of oil is going to be in the future.

CT: Yeah. You could — whatever — predicting oil prices when you consider, like, how geopolitical events can change the oil price overnight, or how like a major regulatory change in the EU, China America could change the oil prices overnight. What I’m most interested in ExxonMobil, it’s a longer term play. You’re talking about you should assess investors, what they want. Exxon, for the short term opportunity, there’s all different kinds of ways to use, like, leveraged ETFs if you want to predict where oil will go in the next month or two.

But what I like about ExxonMobil is the steady eddy-ness of this dividend aristocrat because so we’re talking about, like, it’s the per share quarterly dividend has not grown much, since the oil pricing bust of late 2014. And late 2014, a crescendo happens where non-OPEC production of America and Canada’s — like Canada’s oil sands, America’s fracking boom, all of a sudden, you have, like, millions and millions of barrels being added per day to the global supply, and that OPEC decided to fight for market share. So from late 2014 to early 2021, you basically had a prolonged oil pricing bust. Oil prices kind of recovered in 2017, 2018, but they weren’t – it wasn’t like the heydays of the 2010, the 2012 period.

So, what I like about Exxon going forward is, as its cash flows boom with oil prices recovering, instead of increasing its dividend aggressively, it first focused on paring down its debts. So, like, I would talk about $30 billion net debt reduction. That’s kind of where a lot of its cash flows have gone. It’s just repairing the balance sheet because of this prolonged oil pricing bust. So over the past few years David’s right, the dividend has not grown much on a per share basis. However, when you look going forward, ExxonMobil is now in a position, excuse me, ExxonMobil is now in a position where it can start to aggressively reward shareholders.

Like, we’ve seen its share buybacks, like they spent, I think, around $15 billion last year, buying back their stock because that’s an easy lever to pull because you can, if you increase your dividend, you’re increasing your cash flow outlays professionally into the future, or if you buy back the stock, it’s that you can flex it up or down. So they started out by rewarding investors by buying back $15 billion dollars of their stock last year, and they pushed through at 3% or 4% sequential increase in their dividend in the final quarter of 2022.

Going forward like this upcoming October or September, they’ll probably announce a much larger dividend increase because they’ve already done the hard work of repairing their balance sheet. So, I think that dividend growth story, it’s about to start… they’ve maintained their payouts during a prolonged oil pricing bust.

DAC: But nobody said that. Right, Callum? You’re just guessing that. Right?

CT: Yeah. This is purely — I would speculate they will push through a sizable per share dividend increase during the final quarter of this year, and the speculation is built on they’re going to achieve their cost reduction targets of reducing their annual operating cost by $9 billion versus 2019 levels. Their annual interest expenses have shifted. They’re shifting lower from like 2020 they spent $1.2 billion on their interest expenses. They spent $0.8billion last year. So their interest expenses have gone down as their net debt load has been brought under control.

And then I would add because their oil and gas production base is finally growing again, they’ll have a growing oil and gas production base, they have a repaired balance sheet, and they’ll be able to push through some sizable dividend increases, something that they haven’t done in the past. Like, ExxonMobil’s Dividend Aristocrats status was maintained in part, like, by just very marginal payout increases from the 2015 to 2021.

The outlook for ExxonMobil, now it’s pretty bright at $70 WTI, Brent environments. But you can’t predict the price of oil. I mean, you could — if you think a recession’s going to happen, stay away from commodity names because I mean, recession just kills commodity prices in almost every scenario.

But if you think recessions is to be narrowly avoided, all this, like, commodity names, it should like I think there’s a lot — there’s some modest capital appreciation opportunities and a meaningful matter of fact income generation potential for companies that have repaired their balance sheet. And you look at ExxonMobil compared to something like – so one of the reasons why I like the premium David was saying compared to some of the other names in energy is because it doesn’t have exposure — real exposure to Russia like Shell and BP had, and TotalEnergies, France’s company had a lot of assets.

DAC: Well, because they had to shut down their Russian operations and take a hit.

CT: Yeah. ExxonMobil was hit. It was like $3 billion or $4 billion compared to like BP (BP) owning 20% of Rosneft (OTC:RNFTF).

DAC: Right. That’s why they don’t have exposure to Russia because they basically just gave up on Russia.

CT: They originally gave up or, like, started giving up on Russia back in the early part of the 2010s decade, like, in 2014 ExxonMobil began parting ways with Russia. And for an energy major of its size, a small $3 billion or $4 billion hit – a $3 billion or $4 billion hit a company of ExxonMobil size is pretty modest. We’re not talking of tens of billions.

DAC: No big deal. That’s my point here.

CT: It’s not like…

DAC: No big deal. Yeah. But yeah. And so, but Russia and Iran are causing other issues for ExxonMobil in price of oil right now because they’re just — they’re running at the highest levels they’ve ever run. Iran is putting out more oil than they ever have. And Russia is — the sanctions are not working. China, India, everyone is buying their oil. So, they are affecting the supply side. And then on the demand side, it is being affected by the Fed, the interest rates. China reopening hasn’t come to fruition like everyone thought. But I kind of — we kind of got off track a little bit where we’re talking more about the price of oil and stuff.

And so I know that’s important, but basically ExxonMobil like Callum was saying, it’s like – they can make money at $70 which it’s at right now. So it’s really not about the price of oil as far as my argument as to why you probably shouldn’t invest in ExxonMobil right now. It’s more of a investor philosophy. Investing is counterintuitive. You buy — just like what Buffett always says, be fearful when others are greedy, and greedy when others are fearful. Right now, everyone’s super greedy on the greedy side. The synopsis that Callum is espousing is well known and it’s been well known. I think Callum was writing about Guyana in, like, in 2017.

So everyone’s already heard about it. So everyone’s already in the stock. And that’s kind of why it stalled out. Once you get to the top, there’s no one else left to buy. It kind of peters out. There’s no more buyers, everyone’s already bought. And so there’s the godfather of value investing, Graham, he had several different principles, but the — his second principle was, I’m trying to think of it exactly, but he said something to effect of, expect volatility and profit from it.

So, you know, he viewed volatility as a given, and it’s an opportunity to either buy stocks at a discount or sell them at a premium. And I’m saying ExxonMobil is definitely at a premium right now. It’s trading at 32% above its long term average rate of $80 a barrel, and right now if I had a big gain in it which I did, I already sold mine, but that’s pretty much what I’ve been saying is, I would take profits and redeploy them into other only gas assets that have better opportunity for upside and higher yields. So that’s really my point.

CT: What I like about Exxon is the Steady Eddy-ness of it. So it is — a lot of the positives are well known, but those positives they’re very needle moving. So, you look at its huge exposure to the Permian Basin. Recently Darren Woods, the Chairman and CEO of Exxon, he’s talked about how they’re pursuing new fracking technologies to try to boost the oil recovery rates there. The recovery rates of unconventional plays, it’s about 10% like, in the North Sea and the Gulf of Mexico. You can recover north of 50% of the oil in place. Fracking, we’re just scratching surface there.

So, like, one thing that’s working for ExxonMobil’s favor is you can see where the upside opportunities lie. So, like, before I get there’s always the oil and gas prices and where that goes will influence the short term movements in ExxonMobil. If you look at it, there’s a lot of technology improvements that could happen in fracking plays. This is not low hanging fruit that we’ve seen over the past decade. This would be something like, you got to get all your PhDs down there in Texas and in New Mexico to work this out.

Because we’re talking about how do you keep the fissures open when you frack a well open longer? Because you use sand as a proppant to keep those fissures open, to get the oil flowing. I know they’re — I don’t know exactly what they’re testing out because you didn’t get too specific into it. But if ExxonMobil could increase recovery rates in the Permian Basin from 10% to 12%, 20%, or something that, like, starts to mirror like half of what you would put on a conventional play I mean that would be an immense amount of upside that’s not priced too.

And I think like in Guyana, everyone knows Guyana is like a huge growth driver for Exxon, but it continues to deliver in steady eddy success where every year you’ll hear ExxonMobil and its partners announce a couple new big discoveries, another 1 billion barrels or 2 billion barrels of recoverable oil has been found. ExxonMobil, you can see the upside and they continue delivering where if you talk smaller oil and gas companies, there might be a lot of hidden potential there, but also a lot of hidden risks. Like, maybe their assets aren’t as productive, whatever the situation is.

DAC: The higher the risk, the higher the reward.

CT: Yeah.

DAC: And just about the fracking thing as far as what you’re saying, that’s actually how I got started. I got my very first article was published as a guest post in the Wall Street Journal in 2011 when the fracking boom, the first fracking boom started when they actually figured out how to do fracking. And so this – what you’re talking about now, Darren Woods says that in the Permian, he thinks that they’re going to be able to double the fracking, you know, the ability of the oil they’re able to extract from fracking now with this new technology that they’re working on right now.

But again, that’s kind of old news at this point. We’re talking about it right now. It’s not like something that people don’t know about. So why hasn’t the stock already popped? Because it’s already popped. And then on Guyana, yeah, that’s a great, great find out there. But I don’t know if you’ve been following it too much, but the Guyanese government is kind of upset with the deal that they got.

ExxonMobil kind of made a great deal with them at the time before. And then all of a sudden, now they’re finding all these new discoveries and stuff, and the Guyanese government kind of feels like they got slighted, and they’re doing all they can to try to claw back some of the profits.

CT: So on Guyana, I know the legal situation you’re talking about where if there’s an oil spill, for example, they wanted ExxonMobil and its partners to pay an unlimited sum, so there was no cap and ExxonMobil is like, well, we can’t be exposed to that legal liability. It’s like one of the many ongoing legal situations.

But recently, there’s a favorable resolution for Exxon where — I’m just going to use Exxon instead of the consortium because Exxon is leading the show. So Exxon and its partners, they were willing to put up $2 billion as part of the appeals court process, the appeals court ruled, but no, you can’t be exposed to an unlimited liability and then ExxonMobil and its partners put up $2 billion to help – to continue the legal process.

So, I being exposed to $2 billion, or if it goes up to $5 billion is not illegal, but courts in Guyana are excited with ExxonMobil, but the government is not. However, it’s not a situation where the government could just nationalize ExxonMobil’s assets. It is a contentious situation. I mean, if you and the more it was you’re just saying the more upside, you’ve got more risk, if Guyana where to nationalize its oil industry and that would be devastating for ExxonMobil. However, the legal system in Guyana has been relatively favorable for Exxon. So I think that…

DAC: Yeah. I wasn’t just talking about that one specific thing you were saying. There’s, you know, like you said, the leader of Guyana or whatever. He’s already tried and there to take back some — get a better deal out of ExxonMobil, not just about the spills. But yeah, so there – I’m not saying it’s — they’re going to nationalize the oil there, but I’m just saying that it’s not like everything’s all hunky dory with Guyana right now.

The other point that could be like, of course there’s this whole litany of risks that ExxonMobil lists off in their 10-K. But one of the ones I wanted to touch on that that actually some of the largest shareholders of ExxonMobil have actually hired some lawyers and started resolution on was their net zero estimates of you keep talking about how much they’re going to increase production and things are going to get bigger and bigger in the future.

But then on the other side of the coin, International Energy Agency has a net zero emissions scenario that they’re trying to push into the future, like everybody I think the UN minister just came out and said some really harsh things about oil and gas producers. But what these large shareholders are focusing in on are — is the fact that ExxonMobil isn’t really disclosing the quantitative impact of the retirement of their asset obligations in regards to the net zero scenario. Have you thought about that, Callum?

CT: The way I’d factor in, like, climate change to a fossil fuel producer is that if you do like — when I was working at Valuentum Securities, I would model out its free cash flows perpetually into the future, and you can get like a fair value estimate of anywhere from, like, $150 to $200 per share of Exxon. However, the reason why it’s trading a lot below that is because the perpetuity side of that equation you need to truncate it.

So eventually, ExxonMobil’s assets will be like regulated and taxed out of existence, it’s not that you couldn’t keep producing oil and gas, but it’s that the governments will just prohibit you from doing. So I think that’s already kind of factored into ExxonMobil stock. Like if you assume there was no global warming, ExxonMobil will be deeply undervalued. Well, basically, you see if they could produce oil and gas hundreds of years from now they would be deeply undervalued. But the reason why it’s trading just north of $100 instead of $150, $200 is because people are already factoring in that eventually its cash flows will stop.

So as it concerns ExxonMobil’s commitment to net zero, I think ExxonMobil and Chevron, they don’t like – I don’t know the management teams personally, but I don’t think they really care just because it’s like what is driving global warming is people are consuming fossil fuels. I don’t really blame the oil companies for that. Like the UN, I saw that, like, they were oil and gas companies are killing this planet, but it’s the consumers that are using its products.

It’s like same thing with coal demand. They hit an all-time high last year, 8 billion metric tons burned. It’s like human beings seem to place a lot of the burden on those producing oil and gas and coal and fossil fuels, but as long as people continue to drive vehicles, use plastics and lubricants, the detergents are made from petrochemicals I mean, ExxonMobil will have a huge customer base to meet.

I don’t think ExxonMobil can achieve net zero, but that produces – and scope 3 emissions because it’s a major oil and gas producer. Like, how does a major oil and gas producer not produce — produce Scope 3 emissions. It’s impossible. So I think that’s the way that’s factored in is you just truncate its cash flows and a discounted cash flow model. I think that’s already impacted into the stock.

DAC: But it’s not factored into the discounted cash flow model. That’s what the major investors are saying. That they have not included that in their estimates and so that’s what they wanted more clarity on exactly how that is going to affect the cash flows. And so if they’re saying ExxonMobil glossed over that, and if they don’t — they’re not including that, so their numbers might be higher than they should be. That’s the point.

CT: The asset retirement obligations for all energy companies are probably way lower than what they would need to be, assuming that – but it’s impossible to quantify and qualify when these assets will get shut off. Because if Europe’s like, oh, we’re going to really crack down on companies in 2035 and some American politicians are like, we’ll join Europe. It’s like that’s — there’s nothing you need to have like certainty in order to boost your asset retirement obligations.

I do think that is a huge gray area. And it’s something that’s always going to loom over fossil fuel producers. I just think that there is no way for you on an accounting basis, on a quantifiable basis, to figure out when you’re going to shut off your oil wells because in America, we’re still consuming over a 100 million barrels of, like, liquid fuels every day. Right? Oil consumptions are at all-time highs. The China’s reopening will just keep driving it higher. I think that is definitely the biggest downside risk. And you can see that risk, but it’s impossible to quantify how climate change would impact ExxonMobil beyond just knowing that eventually it’s oil and gas will shut down.

DAC: Right. And you know what, I agree with you on that. I’m just bringing that point up as if that might be something that they’re going to have to do because there is a formal resolution from some of the major shareholders where they want ExxonMobil to detail that out further and include that in their estimates. But I agree with you that I don’t think oil and gas is going anywhere and ExxonMobil, if one of my CNBC compatriots, David Faber, I don’t know if you watched that special he did on ExxonMobil. Did you get a chance to catch that a while back?

CT: No. I was at a trip in Europe for a while.

DAC: Okay.

CT: So, I haven’t seen that.

DAC: Okay. Well, you should watch that, because it’s not just about oil and gas and driving cars and stuff. They make everything. They make the plastic bags and containers and ExxonMobil has in this entire plan of what they’re going to — how they’re going to make money, even if oil and gas is no longer used for vehicles and things like that. So I don’t think ExxonMobil is going anywhere, and I was bullish on ExxonMobil pretty much all the way up until it skyrocketed 30%, 40% above its average. And that’s when I took profits earlier in 2022. But up until then, I was an ExxonMobil shareholder. I just feel like it’s topped out right now, and I’m waiting on a – I would definitely be waiting to get back into it before – I wouldn’t buy it up at these levels is my point.

CT: All right. I remember I’m not going to say his name, right, but Al-Naimi. He was the former Head of OPEC in Saudi’s National Oil – Saudi Arabia’s National Oil Company. I remember back in 2014, he said petrochemical plants will eventually represent over half of our oil demand. So that is kind of like the future of oil is basically it’s plastic and lubricants, detergents. Like, there’s an insane amount of products that are made from crude oil and natural gas.

DAC: Yes, everything.

CT: Oh, yes. Like you look at a Tesla (TSLA), there’s a lot of oil and natural gas in there.

DAC: Right, right.

CT: And there’s no…

DAC: It’s everything across the board.

CT: I like to be looking at clothes, synthetic fibers, synthetic rubber. And so I think that one of the things about ExxonMobil why I like it is a long-term player is because it – if oil – it’s how climate change will impact this upstream production will be negative. But it does have a way out of it in the sense that a huge global integrated petrochemical base, and it has a pretty good understanding of biofuels.

So if you can’t use oil to feed petrochemical plants, it can use its biofuel industry and you use like out, like fourth generation, fifth generation algae to that because it’s out of the high fat content to eventually produce these plastic products and detergents that we need. So I…

DAC: Yes.

CT: It is – and I think it’s climate change and how that impacts the fossil fuel industry. It’s talked about a lot, but I think you can make a case that ExxonMobil should better showcase its strategy for, like, 2050. Because then over the next 10 years, we’re going to continue consuming a lot of oil and gas. But eventually…

DAC: I think ExxonMobil is going to – they’re not going anywhere. They’re definitely going to keep making money regardless. They got a great management team.

But as far as the investment side of the coin is, it’s counterintuitive. You invest. You want to get in there when everyone hates the stock and sell when everyone loves it. And right now, pretty much everyone’s in love with ExxonMobil like Callum is. And so I’m more of a contrarian investor, and so that’s why I took profits. I think it’s at a top. And I’m going to – I would wait for it to come in substantially before I would consider putting my money back to work in ExxonMobil.

CT: If you are invested…

DAC: It’s a boom bust. It’s a boom bust thing. We’re definitely at the top of the cycle for ExxonMobil. It was like, what, $35 in 2020 and it could be $35 again, regardless of all the pomp and circumstance, what the future might hold for them?

CT: If you’re talking, like, what would be the best capital appreciation or income generation opportunity over, like, a short-term view and ExxonMobil that’s already rallied, and because oil prices are – they’ve come off considerably from their highs in 2022, it probably wouldn’t be the greatest investment.

My thesis is all – it’s based on like a multi-year holding period. Like, if you wanted to buy ExxonMobil and hold it over the coming years, I think, there’s a lot of income generation growth and some capital appreciation upside there. Because over the short-term, it really comes down to are you bullish on oil prices? Will we avoid a recession? Are you bearish on oil prices? Because the recession is going to grip America, Europe, and China at the same time, and send the global economy to a downturn for a while.

I – for me, what I like about ExxonMobil is because it’s a long-term buy and hold play, sleep easy at night kind of play. In the short-term though, I would agree with David that it is not like the greatest opportunity there because a lot of the gains have already been had. I – my thesis is entirely long-term…

DAC: Right.

CT: Just because ExxonMobil, it can be prepared for any eventuality. I mean, I – if, like, as it concerns climate change, I believe in it, but I’m also not panicking about it. Like I think the human race is very resilient. We’ll always find a way to…

DAC: Yes.

CT: It’s the apocalypse pending. It’s like the nuclear apocalypse. Mass starvations could happen. I – the human race will continue going on. We’ll survive. We’re not going to kill the earth. Yes. I’ve never – I – like people say climate has changed, I see a tsunami of cash. Like, how are you catching on that tsunami? I think…

DAC: I want to say one thing, Callum, before I forget. I agree with you. I’m not a short-term trader or a short-term investor. I’m investing for the long-term as well. And one of the things that I’ve learned over my 30 years in the market is when you initiate a position and establish your basis, that’s one of the biggest factors in how much profits and how well you’re going to do on that investment.

And so that’s why I’m saying right now. Like, if you look back in my articles, this has already happened once already. ExxonMobil popped up to 120, I think a few months back and then it dropped back down to 85. And that’s when I bought back in at 85 for the service. And then it went back to 120 again, and I – and in, like, four months’ time. And that was such a quick rise that I snapped it off again at 120 just because I’m doing this for income.

There’s – with – the way that the methodology of my father, I inherited a multimillion dollar portfolio from my father when he passed away in 2013 and managed it for my mom until she passed away in 2019. But his thing was that you’ve got income. There’s two ways to create income for retirement.

One is by buying high dividend or dividend producing stocks. The other one is by taking capital gains in stocks and either redeploying them into higher dividend producing stocks or just booking those gains and using the tax loss strategy to negate the capital gains if you’re in a tax advantaged account, but that’s cash flow from your investing accounts is cash flow, whether it comes from dividends or it comes from capital gain.

So that’s kind of why I have a little bit – there’s a lot of income investors where they only consider just the dividend side of it. So that is why I took the profits on ExxonMobil and I’m waiting. I still believe in the long-term story, but I think it’s overpriced right now.

So if somebody buys ExxonMobil at 105 where it is right now, and it drops back to 85 or something like that, and they’re sitting on a 20% loss, that’s not going to make me sleep very well at night. So it’s not a sleep well at night stock for me right now because I feel like it’s at an elevated level and like the floor could fall out from underneath it at any point in time. So I’m – that’s why I’m waiting in hopes that it pulls back to a position where I feel like it’s got support underneath it that it will be profitable for the long-term.

CT: A lot of like ExxonMobil comes down to, where do you think, like, basically, will we see a recession in the U.S. during the second half of this year? Because that’s like one of the reasons why it popped up to 120, when oil prices boomed, and in the wakes of Russian invasion of Ukraine, but then oil prices started to pull back a lot because of these recessionary fears.

I think that’s why, like, you’re – you probably saw Saudi Arabia recently. It’s was like, well, and adds up another 1 million barrel per day voluntary reduction, but they’re kind of preparing to the chance of, is there going to be a recession in the second half of this year? I like Exxon, so I think we’ll avoid that recession because of just the resilience of the U.S. economy, low official unemployment rate. People are complaining about inflation, but they’re still getting paid, they can still make it on their mortgages or rents and what so forth.

But there is, like, in terms of an entry point, this is not, like, the most attractive time historically to enter in ExxonMobil, but I think the company still has room for some upside just because of integrated – fully integrated operations. Its upstream base is finally starting to get things going favorably. This oil and gas production was declining the 2010’s decade. Now it’s increasing.

But my – I think if it went to 105, I think it drops down to 85. What would make me sleep easy at night is knowing that five years from now, 10 years from now, I’m – I think there’d be a meaningful capital appreciation. If you were just in that, like, decline that would, like, shock you, that it wouldn’t be the best opportunity for you. But I think if you have a longer-term horizon, getting into ExxonMobil now makes perfect sense because it, on a fundamental basis, if things are finally starting to go in the right direction across the board, like major cost reductions at a time when it’s upstream oil and gas production is growing, I mean, that is a perfect crescendo for cash flow and earnings growth.

Energy prices will remain volatile, but the environments after the prolonged oil pricing bust of the 2010’s decade, it’s going to be very favorable for upstream companies with growing production. But as in the short-term, there’ll be an immense amount of volatility. So it’s like if you wanted to wait a bit on ExxonMobil, I’d understand, but I still think there’s more upside than downside in the current environment that will avoid a recession.

DAC: Right. And I’m – that’s where we’re on different sides of the coin because I feel like there’s more downside than upside in the near-term, and that’s why I would be waiting. And also one other thing I just want to add is as far as creating a new position, one of my sayings that I’ve kind of come up with over the years is patience equals profits.

And so just having patience and waiting for a stock to come in is probably one of the best ways to create profits for yourself. And then layering into the position, even when the time comes, if you, as my service member knows, I always layer into positions. So I would – even if ExxonMobil did drop back to 80 or so, I would only buy a start off with – I might split it up into four different tranches of buys, and I would buy a quarter, a quarter, a quarter, a quarter, over time just to make sure that I – and I always keep like one quarter in a dry powder in reserve in case it drops even further or higher or lower.

So that’s – one thing is when I was younger, that was some of the mistakes I made. I would be so sure of the future and like all the great prospects that ExxonMobil had that I would say, what? I’m not – it looks so great with the Permian and they’re going to double fracking, and China is coming back online and OPEC cut a million barrels, and Guyana is going to blow up. So I’m going to put my whole 10 grand if that’s what I had to allocate towards a position. Obviously, I got to buy it all right now at 105 because it’s going to 122 and I’m going to miss out.

And then the next thing you know, the next day it’d be down to a 100; and the next day, it’d be down to 95. So my big advice to give to newer investors or anyone that’s listening is to layer in over time and have patience when you’re creating new positions in stocks.

CH: I’d wait for a Dividend Aristocrat or any income generation ideas, the ability to take that and just like, maybe you have drips where you can just reinvest those dividends into the company is a great way to build wealth over time. If you’re very bullish on the long-term opportunity, like, a company like Microsoft because it’s outside the climate change realm and selling technology or like a pharmaceutical company, consumer staple, and you can do this as well.

But if you really want to – if you are very bullish on a company, I think, reinvesting dividends or distribution is a Master Limited Partnership…

DAC: Definitely.

CT: …is a great way to build wealth because it’s just – I – you would compounding wealth, it’s like, I tell a lot of people get rich. It’s not the initial position that made – that make them a lot of money, but it was also the decision to continue reinvesting that as compared to taking years of your profits and buying Starbucks, so luxury watches. I definitely agree with that. Well, however, much money you’re investing in what you’re spending profiles and what you want.

DAC: I agree. You’re right on that, Callum. does I drip everything? I’m tripping everything right now until I need it if I ever do need it. And so, that’s definitely true. Compounding is the way to get rich for sure over time.

CT: Yes. You look at, like Warren Buffett, obviously a well-known investor. He always – almost always layers in his position like Occidental Petroleum or the various Japanese trading houses. He’s been steadily increasing, increasing, increasing his position.

DAC: Yes. I’m actually from Omaha, Nebraska. My father was in a – an Air Force Intelligence officer in Strategic Air Command at Office Air Force Base. And I was born in Clarkson Hospital in Omaha, Nebraska. And that’s where my father transitioned from being an Intelligence Officer. He retired and became a stockbroker managing his own portfolio.

And so I was kind of born and raised under the same kind of Midwestern conservative investing values as Warren Buffett. Some people in investing circles call me the Oracle 2.0, but not because I’m as good as the Oracle, it’s because I’m twice as big. That’s what I [Indiscernible].

CT: I love the oil and gas industry, but I’ve only lived in regions where there’s no production whatsoever, like Oregon, Washington and Pennsylvania. So I’ve known it for like a theoretical basis, but I’ve never really, like, I’ve never been to West Texas. So that’s something I need to do at some point. I go on a big old road trip and see these all in person.

DAC: Oh, yes. Yes, it’s like, this is – ExxonMobil is known as the Texas oil titan. And so everybody here is your – are you in California? Or are you in Oregon?

CT: Up in Seattle, Washington.

DAC: Oh, you’re in Seattle? Okay. Yes. Yes, because I know you’re on the Pacific coast. So I was expecting you to like Chevron because that’s the West Coast major like ExxonMobil.

CT: I – Chevron is also a good company that I’ll probably write some articles about it for Seeking Alpha relatively soon. But I was just focused on ExxonMobil because…

DAC: Yes.

CT: The Guyana of Permian Basin and the Tanzania, it’s got a lot of opportunity. Like, finally, ExxonMobil will be able to grow its production. Like, for, like, in the past 10 years, it’s been slowly sliding lower, and then they finally got everything together to get it growing.

DAC: Right. I sold my Chevron (CVX), too, on the day that they announced a big buyback and I think it spiked up to like 187. And I was like “Okay, I’m taking profits on that. And that’s the top.” And I think that was the top. I think it dropped back down to like 127 or something like that. I haven’t really paid much attention since I sold out on that.

But I understand what you’re saying too about living in those areas. I actually was a consultant for Nike in Beaverton, Oregon. For several years, I’d lived on the West Coast and consulted on the West Coast when I was an IT program manager 20 years ago. And so, yes, there’s a whole different mindset.

Here in Texas, you’re going to be big time out of luck looking for a charging station on I10 going from El Paso to Houston. It’s – they’re few and far between. And so that’s also – everybody here in Texas is – there’s – it’s not driving quite as many Teslas as the other parts of the United States.

CT: And people will bring up like Norway’s EV sales, but like Norway is a country with 8 or 9 million people. That’s not going to decimate oil demand if Norway starts selling a lot more EVs. Like, America, the majority of cars sold are powered – they are hybrids, but they’re still powered by oil and gas. So it’s like – or they’re powered by gasoline and some diesel.

But it’s like – when you look at, like, the EV fleet, like, we’re just seeing it begin to take up a modest chunk of total unit sales for cars. Same concept in China, there’s another huge demand growth. So it’s like – the EV story is like beginning to play out, but people are thinking that oil demand will get decimated. I mean, you can’t be like 5% of new car sales and decimate demand. There’s still the existing fleet. There’s still people now commuting back to the office.

I mean, airliners have no idea how to replace kerosene jet fuel with that, a different sort of technology because where do you get – where’s the energy density? I mean, if you can’t have a huge battery on these planes, they wouldn’t get off the ground.

DAC: No, no. Here, you’re right about that. EVs are for short-term short duration trips. Even Ford (F), at their last Markets Day was talking about that. As far as they’re not anticipating having these long distance EV vehicles because – or like in the trucking industry or delivery industry where there’s a payload on the vehicle, it just doesn’t work out. So they’re doing the hybrids and everything for over a 300-mile radius. And so they’re not planning on people taking their EV across country as far as their generation 2 and 3 EV vehicles.

But I do think they will – they are still just at their infancy. Tesla (TSLA) has definitely got the lead on that, but I don’t see them taking over the entirety of the cars and trucks on the road for a long, long time.

CT: Like, as it concerns ExxonMobil and its ability to navigate things, I – it eventually will become a major utility company because it’s like operating power plants and offshore wind turbines. It’s kind of in the same sort of operational expertise of ExxonMobil. Like, if you’re drilling a deep water well, you know a lot about how to manage, like, major industrial assets that are out in the Gulf of Mexico dealing with like hurricanes, water swells at like, high levels of sodium in the water, which corrodes the equipment.

So I think the long-term future of Exxon is, they’ll have a lot of petrochemical plants fed by like biofuel, like, basically algae, converting that into using the fat of algae to make plastics, lubricant, detergent, fibers. And we also have ExxonMobil be a major electricity generator because these EVs are – the power grid is not set up to handle, like, in America that’s powered by EVs and ExxonMobil is a company that makes that happen. We need…

DAC: Power grid nowhere near ready to go. And I agree with you on that too, Callum. I’ve been thinking that all along is that ExxonMobil, it’s an energy company. So what – if energy transitions into EV electrical energy versus oil and gas or whatever, then they’re going to be into that. That’s what they’re going to be in.

On top of all those other things, we’ve talked about as far packaging. And oil and gas, like we both agree it’s in every product and service pretty much across the board. And so I don’t think it’s going anywhere for sure.

CT: That – it’s – that’s why it’s so important to have a strong balance sheet. If you have like, regulatory requirements and requirements that are increasing and, like, all these politicians, regulators are coming to your business and you have a bloated balance sheet. It’s kind of like – that’s what kills the company, which is why I think it’s so important that ExxonMobil took advantage of the strong free cash flows and paid down, like, or basically built up a lot of cash on the balance sheet and paid down its debt.

Like the companies that won’t survive the energy transition and the regulatory side of things and the tax side of things in particular are those that don’t take advantage of the good years and have a strong balance sheet. If you have a weak balance sheet, regulators and the – like the creditors and the banks will just kill you, they’ll kill your business. Yes, that’s why I like ExxonMobil’s management team. They have a very strong long-term management team.

DAC: And they could self-finance, they don’t have to.

CT: Yes.

DAC: Take out loans or whatever to drill new wells and things like that. So I think we’re pretty much on the same page, except for – I just feel like it’s overvalued right now. And I would – I’m advising I’d wait for a pullback before initiating a position, but I still like ExxonMobil.

CT: That – well if you consider the self-financing aspect, all of these LNG export projects from, like, sometimes it’s, like, I think, Tellurian and was, like, the Former Head of Cheniere LNG. He then found his own company, and then was going to, like, trying to raise financing. But it’s very difficult when you don’t have any assets, but you have big ambitions and a plan to try to raise the financing of the capital to like, meet those ambitions.

ExxonMobil can have big plans and do it itself. It doesn’t need to go around basically begging investors for cash. So ExxonMobil is like the future is in its hands. I think what we’ve been saying, it’s like, if you are bearish on the U.S., like, the global economy because of rising interest rates inflation, I mean, governments can no longer do crazy deficit spending because all of a sudden it starts to hurt you a lot of your financing government deficit spending higher interest rates and you’re bearish. It’s kind of like, the long-term story is grades. The short-term story just comes down to are you bullish or bearish on our ability to navigate all of these headwinds facing the global economy. And I’m on the bullish side of things, you’re on the bearish side of things by, like, the one thing we can agree on.

DAC: It also has to do with the stock performance, not just the macro situation. The stock’s up 200%. So it’s about the stock. For me, it is a big part of it, not just the headwinds coming on. I also think the stock has gone- it’s something on a parabolic run if you look at the chart, and it’s rolled over in the last year. And so it’s in the middle of a rollover.

So as far as talking about the technical aspects of the stock is an issue for me as well, not just the macro view and those types of things. I think that’s going to be one of the reasons why it does continue on a downward stroke. When – based on the technicals right now, a lot of people have different ideas about the importance of the technical aspects of a stock. But for me, it’s basically just telling you who’s in charge. Are the bulls in charge or the bears in charge?

And so for the last three years, the bulls have been in charge, and they’ve just – everyone has just been piling in and piling in. The story was horrible in March. And then all of a sudden, everyone’s like, hey, guess what, oil and gas is where it’s at right now. Nobody has invested in that. So it’s just been going up, up, up, up and they’ll finally, it hit that range where it’s almost at your point where you say, hey, the future cash flow model says it should be 120. Well, that’s where it was.

And so a lot of people are like, okay, it’s fairly valued here. It’s time to take profits. And so it’s rolled over. So now, kind of seems like the bears are in charge. And so we’ll just have to see.

CT: I think ExxonMobil will fight back with aggressive share buybacks now that it’s balance sheet is fixed. Because I that’s, like, what I…

DAC: Because I got to tell you, they – they’re terrible at share buybacks. You know what I mean? Like, they always buy back shares at the high point and then the next thing you know, it drops. And they’re like, oh my God, why – they are not the best allocators just for – like you said, they bought what, $15 billion back last year or something like that?

CT: Yes.

DAC: Yes. What price point do they get for that? Like, probably higher than it is right now. It’s not really the greatest investors as far as buybacks go.

CT: It’s very, like, the oil pricing bust. They didn’t have the ability to buy back their stock because of the bloated balance sheet.

DAC: Right.

CT: At the – but that would be the perfect time.

DAC: Yes.

CT: So that’s why commodity need to have…

DAC: Yes. That’s why they suck at it.

CT: You need to have a strong balance sheet throughout the economic cycle.

DAC: Right.

CT: The time when you should be buying back your stock is when because…

DAC: They can.

CT: …yes. Exactly. I think going forward, they might have changed their mentality on that a bit. So now they’ll be able to be more opportunistic.

DAC: That’s the point I was making Callum. I don’t really put a whole lot of faith in like, oh, they did it, that big $70 billion buyback, $2 billion, $3 billion, $5 billion tranches or something like that. That didn’t really do anything for me.

CT: Yes.

DAC: I’d rather them increase the dividend. They should have taken that money and put it in the dividend, not buybacks.

CT: I – dividend increase is a – because it’s a longer-term capital allocation thing, if you want to maintain your Dividend Aristocrat status, it’s a much bigger commitment by increasing your dividend. Even if it’s a small increase, it’s a small increase, but like over the next 100, 200 years that you’re going to have to keep making good on that, where buybacks is, it’s a flexible lever that you can pull.

I think one thing that will help ExxonMobil‘s technical performance is management just throwing gobs of free cash flows at its stock, but whether or not that in order for share buybacks to, like, generate shareholder value, you have to be buying back the stock at below its intrinsic value, and we’ll see how the economy pans out over the next half of this year. But I mean, it would have been perfect if ExxonMobil could buy back enormous amounts of its stock in 2020, 2021. The balance sheet just wasn’t there.

DAC: Right.

CT: Now I’m glad, at least, management is, like, rewarding shareholders instead of empire building. Because they – instead of buying back stock, you could pursue a whole bunch of big, like, projects that don’t generate any shareholder value whatsoever. You like make a LNG export plans you don’t need or grow your…

DAC: One thing you haven’t mentioned that they’re really big on and they’ve done a lot in the past is growth by acquisition and that was the topic of one of my articles in the past is they do have – they have done a lot of repair to the balance sheet and got the free cash flow. So a lot of times, ExxonMobil, they go out and look for to make an acquisition to improve their output and all that.

And so, that could be in the cards. I think they’re waiting too, just like I’m and everyone else. I think they see some headwinds up ahead and supply demand situation right now isn’t playing out like everyone thought, China is not coming back online like they were supposed to. Iran and Russia are still producing, and Venezuela are all just producing at high, high levels right now on the supply side.

So if a recession hits and some of these other like FANG, Diamondback Energy, and Devon or even Pioneer was kind of talked about as well a while back that ExxonMobil might be getting in the market and pick one of those up.

CT: I heard that – I think it was a Wall Street Journal story about ExxonMobil engaging in preliminary talks with Pioneer (PXD), which makes sense. I mean, you have a lot of scale in the Permian, so acquiring Pioneer. I think there’s a lot of operational overlap. One company, I don’t think they would – they’re going to do it. But if you bought Hess (HES), just to gain greater exposure to Guyana, because Hess is U.S. onshore assets like in the Bakken.

That would overlap with ExxonMobil’s existing position and it would have a much larger stake in Guyana’s future. Plus, there’s some assets Hess owns in Southeast Asia, like Malaysia, and Thailand, and ExxonMobil is also in that region, I think, because ExxonMobil has an LNG plan in Papua New Guinea. So I think Hess is a potential target or a big Permian company like, Devon, Pioneer, some of these other companies out there.

DAC: I know you mentioned that every time you mentioned something, you made me think of another thing I – that I had thought about. But a lot of those countries that you just named off and places where ExxonMobil is dilly dallying or whatever, it’s – I think that increases the risk quite a bit just because of the political status like, who knows what’s going to happen, like in any of those countries? I have no idea, what I mean? So…

CT: You need a lot of geographical diversity because you need to operate basically in every country because the asset nationalizations are always in the cards. There are huge increase in taxes or like an export bans. You have to meet local demand at much lower prices. Like, what all the energy major, it’s either do you want an energy major or a company that operates primarily in America if you are looking at this space? A company that operates only in one country, like if you’re like, Uganda is developing an oil industry and there’s some companies that are operating there that are listed in the – in London.

Uganda could be loaded with oil and gas. But if there’s a change in the Ugandan regime, or I mean, your assets could be wiped out overnight. Huge amount of reward, huge amount of risk if you’re picking a company that operates in only one country, which is a lot like ExxonMobil, because Exxon can invest in Uganda’s oil industry and help it develop oil refineries and petrochemical plants there. But if the worst thing happens, it’s not over for ExxonMobil. But if you’re just picking one country to invest in America is the only real serious game in town.

DAC: Yes. And they did just have a big, I think it was Brazil – off the coast of Brazil where they – I think they went after like three times and finally gave up and it just didn’t pan out to what it was supposed to be.

CT: Some of the pre-salt plays out there, I don’t know a lot about the petroleum engineering side, but it’s just like pre-salt, drill it a little bit deeper, drill a little bit farther out. And they weren’t able to hit the kind of, like, exploration success you see in Guyana or the Gulf of Mexico. Because the engineering complexities, combined with the oil discovery, is not being large enough. It just – Brazil’s – it’s – it has a lot of oil and gas there, but a lot of it just isn’t that economical. It is a large oil and gas producer, but it – Guyana, maybe at one point will produce more oil than Brazil just because it’s more economical there.

DAC: All right, man. I think we pretty much took it out, man.

RS: Well, thank you, Callum, and thank you, David. I really appreciate you both joining us today. And all articles referenced from Seeking Alpha, you can find it on the show notes below the episode description of this podcast.

David Alton Clark runs The Winter Warrior Investor investing group. You can find Callum Turcan on Seeking Alpha.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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