A Contrary Look at Multinational Oil Shares

It's difficult to fault the performance of XOM stock (blue line above), as it has nearly tripled in the recent bull market.

Interestingly, however, over the past decade, XOM--denominated in barrels of WTI crude--has actually fallen in valuation. In other words, crude oil has handily outperformed XOM stock.

Another way of viewing this relationship is that, given XOM's ability to at least replace reserves, investors are placing a lower value on each barrel of oil-equivalent owned by XOM. That fact is masked in the price action of XOM only because oil itself has been rising so quickly.

When we look at the bull market period of 2003 - present, however, we can see that XOM price has been trading at an average valuation of 1.1 x the price of a barrel of crude oil. The bull market in XOM is a function of the bull market in crude, not a richer valuation of XOM.

Why might the market not price XOM as a higher multiple of crude? Several reasons come to mind:

* Ecuador
* Venezuela
* Bolivia
* Nicaragua
* Russia
* Kazakhstan

All of these countries, to varying degrees, have moved toward nationalization of their oil assets. This has left the oil multinationals with fewer areas for exploration, particularly given competition from China in Africa and Southeast Asia and the failure to reach a privatization accord in Iraq.

What that means in practical terms is that the upside for share prices of multinationals such as XOM is increasingly dependent upon a continued rise in oil prices. Should the price of oil fall due to a slowing world economy, XOM's share price could take a hit even if it maintains a 1.1 multiple of crude. At a multiple below 1.0, which we've seen several times during this bull run, XOM could retrace a chunk of its bull gains during an economic slowdown.

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