Integrated energy behemoth ExxonMobil (NYSE:XOM) is counted on by millions of investors for strong profits, and billions in cash returns to shareholders through a combination of share repurchases and dividends. To provide these, ExxonMobil leans on its massively profitable upstream and downstream businesses.
Of the many constantly evolving factors affecting the oil and gas industry, ExxonMobil advises investors that two in particular have the potential to make-or-break the upcoming year. Read on to discover what these are, and why 2014 is shaping up to be a great year for the largest energy company in the world.
As ExxonMobil advises shareholders, the demand for energy is closely correlated with economic growth rates. While the economy in the United States is by no means growing at a gang-busters rate, the steady recovery since the financial crisis is expected to continue this year. Furthermore, much stronger growth rates are projected in the emerging markets, thanks to booming global populations and rising middle classes. For example, economic growth in China is likely to have reached 7.6% in 2013. This is why ExxonMobil has an upstream, downstream, and chemicals business in China.
A slew of integrated majors, including ExxonMobil, are focusing on faster-growing economies around the world to sustain long-term growth. Chevron (NYSE:CVX) produced an average of 2.61 million barrels of oil equivalents per day in 2012, about 75% of which occurred outside the United States. Its immense global network supports retail outlets on six continents, and currently maintains 11 power-generating facilities in the United States and Asia.
Supply and demand
At a fundamental level, oil and gas are commodity businesses. This means that the markets are price-driven, and as a result, industry profits have to constantly strike a balance between supply and demand. Fortunately, ExxonMobil believes global energy demand is likely to rise by 35% over the next three decades. This is due to the fact that the world's population is expected grow to nearly 9 billion by 2040, and the global economy to more than double in that time.
Supply should meet this rise in demand, thanks to technological advancements such as horizontal drilling and hydraulic fracturing, that have made viable resources out of previously untapped oil and gas fields.
At the current level of crude oil prices, which stand at approximately $92 per barrel in the United States, ExxonMobil can count on pricing as a tailwind heading into next year.
Should oil prices drift significantly lower in the year ahead, so could ExxonMobil's profits. Of course, it doesn't seem like this is a very likely scenario. Central banks around the world remain committed to manufacturing a healthy level of inflation. This should provide a certain amount of downside protection to oil prices.
Swings in oil prices are a particular concern for ConocoPhillips (NYSE:COP), because it isn't as integrated as ExxonMobil or Chevron. ConocoPhillips spun off its refining unit, so ConocoPhillips can't offset poor upstream results with steady downstream growth should the pricing environment reverse. For example, consider that ConocoPhillips advises investors that its profits will fluctuate by $30 million-$40 million for every $1 per-barrel change in West Texas Intermediate prices.
Closely monitor economic conditions and oil prices
The factors most important to ExxonMobil—specifically, global economic conditions and oil prices, driven by supply and demand—appear to be working in the company's favor as we head into 2014. ExxonMobil has seen its shares significantly increase in value, and this is probably the reason. ExxonMobil has an extremely talented management that consistently produces returns on invested capital that place the company at the top of its industry. At the same time, positive trends can quickly reverse, which is why investors should closely monitor these items going forward.
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Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.