MarkReeth (50.54)

How to Invest for the Forthcoming Zombie Apocalypse, Part 2: Fuel

February 03, 2012 – Comments (2) | RELATED TICKERS: XOM , CVX , RDS-A

The zombies are coming.  You know it, I know it, and the Mayans knew it.  But before they get here, I'd like to offer some friendly investing advice that might also save your life someday.

You’ve done it; you’ve escaped!  Through determination, luck, and investing prowess you have successfully managed to avoid being bitten by a recently reanimated corpse and have escaped from your city in the process.  Kudos to you!  Now you can sit back, pop in your favorite Journey CD, and cruise into the sunset.  Now it’s just your average carnage-filled roadtrip!

But as you whiz away from the walking dead in your vehicle of choice, you hear a sound.  A sound more terrifying than the moans of the zombies at your heels.  More horrible than the screams of your friends and family.  The sound of your engine running out of gas.  You poor bastard.

So you pull off the road into the nearest pit stop, get out of your car, ignore the stench of decay and rotting flesh, and stare at the large neon signs begging you to use their gas.  But how do you know which to choose, let alone invest in?  Don’t worry, that’s why I’m here. 

Withdraw Into Your Shell

Your first option, and perhaps your least profitable, is Shell.  On Thursday the company reported a profit of $6.5 billion, down 4% from $6.79 billion a year earlier.  Shell’s downstream unit (where the refining and marketing gets done) posted a loss of $244 million, compared with a profit of $411 million a year earlier.  And while the company announced it would raise its dividend 2% beginning next quarter, even this wasn’t enough as analysts had expected something closer to a 4% increase.  So what does all this mean for RDS-A?  Growth.

Side by side with the earnings report, Shell management described an aggressive growth plan that, they claim, will improve operational cash flow by up to 50% through 2015.  This was pretty interesting, considering that Shell is viewed by some as a good defensive stock in the Oil and Gas sector thanks to the company’s diversification with natural gas projects in Qatar and oil in the Americas.  No matter which way you argue, thanks to the variety of investments the company has made Shell is positioned well for the coming years and should remain profitable.  Despite all the zombies. 

Bottom line: Zombies may be shells of their former selves, but that doesn’t mean you should avoid all shells.  Buy Shell for the long term profits.    

Time to ChevRUN!

As the stench of decay and moan of ghouls draws closer you think to yourself, then again, maybe I’ll fuel up at that Chevron.  After all, Chevron stock is looking pretty tempting after taking a beating this past week due to poor earnings, as it continues to float along just below its 52-week high (something it has done four times this year; maybe now’s the time to break that resistance).  A week ago it announced fourth quarter earnings of $5.1 billion, down 3% compared to last year. CVX’s stock price fell accordingly, and has been sitting low this past week.  Like all the other major oil players, Chevron has been hit hard this year by a major decline in natural gas prices and a smaller pool of easily accessible oil fields.  Overall it’s been a tough year for Chevron. 

How has Chevron responded?  By doing the same thing you should be doing; no, not hunting down zombies, investing in future growth.  In 2011 CVX spent $29 billion in capital expenditures, and expects to spend around $33 billion in 2012.  Most of the investing will be aimed at Chevron’s massive natural gas field in Australia, nicknamed Gorgon, which Chevron boasts contains “40 trillion cubic feet of gas and and estimated economic life of at least 40 years."  Production at the field begins in 2014, which may seem like a long time to wait for this cash cow from down under.  But until then, CVX is well positioned to play the decline in natural gas prices by countering with its large number of refineries and deepwater explorations that will continue to produce oil.  Oh, and don’t worry too much about the lawsuit in Ecuador; it won’t really matter once the zombies attack.  Unfortunately all the lawyers will survive, as even zombies know that the flesh of lawyers is toxic and thus will refuse to eat them.

Bottom Line: Chevron is hurting like all the other big oil players, but better international exposure and long term prospects make CVX a profitable company in the long run.  Buy Chevron. 

Better Get Mobil

As the wailing of the undying grows to a roar in your ears you wonder if you should refuel at that ExxonMobil over there.  After all, it is the world’s largest oil refiner, a fact that has helped buoy XOM in these tough economic and zombie-filled times.  This past Tuesday XOM announced earnings that at first glance appear pretty healthy; quarterly profits were up 2% from a year earlier and earnings per share were up 6%, and for all of 2011 earnings was up 35%.  Yet the stock price opened low and only went lower all day. 

That’s because people were reading about how poorly XOM’s downstream unit did for the year, with profits outside the US being cut from $924 million to $395 million and profits inside the US dropping a whopping $196 million.  Those same people could’ve also been watching the price of natural gas drop for the last year or so as supply outpaced demand.  Or maybe they read this article about how Exxon’s plans to exploit shale deposits in Poland have been put on hold due to the high cost of drilling.  They may also just have heard about the zombies and were simply trying to exit all their positions as quickly as possible. 

What those people should’ve been doing was following Jason Moser’s advice in this video about calculating payout ratios; if they did they’d have seen that ExxonMobil has a healthy ratio of 22% after a 2.2% dividend, a dividend the company has consistently increased over the years.  Keep on looking and you’ll see the company has $11 billion of cash on hand compared to only $17 billion in debt, an easy amount for the company to cover, and that with a P/E ratio just under 10 XOM is far from overvalued. 

Bottom line: ExxonMobil is one of the best run companies in the world with a great record of success.  All that remains to be seen now is if the company can overcome challenges in growing oil and gas production.  Oh, and all the zombies.  Buy ExxonMobil.

As you stare at all the fuel investment options right in front of you, you realize something; it doesn’t matter which you choose.  Though the world may be going to hell, it will always need gas to get there.  It doesn’t matter if that means oil or natural gas; Shell, Chevron, and ExxonMobil are well positioned to remain profitable until the end of the world, and then some.  Much like you pausing as you flee from the zombies, low natural gas prices and low earnings are simply pit stops for these companies on the road to profits. 

The End??? 

Now you may think to yourself, what with these zombies roaming about, the world doesn’t run on gas anymore; it runs on braaaaaaaaiiiiiins.  Well if that’s true then the zombies will still be hungry considering the brains of people who didn’t bother to bring spare gas must be pretty small.  That’s why no matter how far or how fast you run they’ll keep coming after you.  But don’t worry; we’ll talk about how to handle that in next week’s post.