Big Oil Can Dodge Anything

October 7, 2008 by Douglas A. McIntyre

Tx00338coilwellgusherodessatexasposThe latest theory about Big Oil is that it will be brought down by falling oil prices. Shares in companies such as Exxon (XOM) and BP (BP) will be battered beyond recognition. Until recently they made new highs almost every month.

Some of the share prices for companies in the industry are already in sharp decline.

According to The Wall Street Journal, "The stock drops are driven by concerns that a world-wide recession will bring an end to the high oil prices that have been the primary driver behind these companies’ record earnings."

But, earnings are relative, and so are balance sheets. Oil companies are in more than one business. High crude prices hurt the refining margins of many of these operations because those prices cannot be passed along to consumers and businesses without killing demand. A moderation down to $60 or $70 a barrel might help that.

As the stock market continues to drop, the real question is where investors can find more value and safety than in large oil production and refining companies. Exxon has almost $40 billion in cash and made $23 billion in operating profits on $138 billion in revenue during the last question. Even if those earnings were cut in half, the firm is a cash machine almost without equal.

Exxon has a 2% yield, and it is hard to imagine that will be threatened at any time in the foreseeable future. Oil prices may be dropping and the industry may have more modest margins, but they will only be returning to the historically normal levels.

What other public company’s can boast those kinds of benefits?

Douglas A. McIntyre