At Berk Advisory we very rarely invest in business models whose revenues and/or costs are tied to unpredictable commodity prices. Therefore, we don’t own many oil and gas companies. There are a few that have enough discipline to conserve cash when everyone is investing at high prices. Often these companies are chastised by analyts and investors and in some cases the press and politicians, because they seem to be reaping the rewards of high commodity prices without “growing” by investing at high prices.
Well Exxon is not one of those companies. It is the only major integrated that has consistently earned well above its cost of capital through the ups and downs in the oil market. And now Exxon is sitting pretty – ready to invest at depressed prices.
Today the WSJ recognizes this positive development.
The Texas oil behemoth finds itself in such an enviable place because it never chased oil’s recent bull run, though it earned heavy criticism for its restraint. In the past two years, as oil climbed near $150 a barrel, politicians called for Exxon to spend some of its riches ramping up production to drive down prices. Other oil companies grabbed expensive new assets that now will be a drain on operating income with oil selling below $50 a barrel.
Exxon Chief Executive Rex Tillerson chose to sit on the sidelines, saying he thought oil prices were unrealistically high and would inevitably fall. As a result, he remained fiscally disciplined, giving the company ample room to weather the plunge in oil prices as rivals flounder.