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Bear of the Day: Exxon Mobil (XOM)

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Recent low oil prices have been a boon to individual consumers and businesses alike, but they’ve also created a difficult situation for oil companies. With WTI crude still below the $50/bbl. level amid fears of both global oversupply and decreasing demand, earnings estimates at Exxon Mobil (XOM - Free Report) have been contracting.

Crude futures fell more than 35% during the last 3 months of 2018, due to increasing supply from the world's top three producers — the United States, Russia and Saudi Arabia - while demand grew less than expected.

The US is now producing more than 11.5 million barrels/day and is forecast to top 12M/day soon. Saudi Arabia and Russia stepped up production last year in anticipation of a sanction related falloff in output from Iran, but then the US granted eight major exceptions allowing other countries – most notably India – to continue purchasing from Iran and the result is a global supply glut.

Legal Problems

In addition to oil price concerns, Exxon Mobil was dealt a blow on Monday when the Supreme Court of the US decided not to hear XOM’s appeal of a ruling from Massachusetts State Court that will require the company to release internal documents about its knowledge of the effect of fossil fuels on climate change.

The suit was brought by Massachusetts Attorney General Maura Healey and alleges that Exxon violated consumer protection laws and also misled its own shareholders by not disclosing what it knew about the damage its products may be causing the environment.

We don’t know for sure what the documents will contain, but based on the fact that Exxon fought hard to avoid release, it’s a reasonable bet that the information contained will not cast Exxon in a favorable light and may subject the company to legal liability.  On its website, the company claims its "Understanding of climate change has tracked the scientific consensus on climate change, and its research on the issue has been published in publicly available peer-reviewed journals,” but critics contend that Exxon has also financed groups that deny climate change.

Exxon is facing several other lawsuits about its role in climate change and also a suit from the Attorney General of New York State that alleges the company misled its own investors about the degree to which global regulations regarding climate change would affect its results - a unique legal strategy.

Estimates Sinking

Analyst revisions have been falling and the biggest impact has been in the Zacks Consensus Earnings Estimate for 2019, which has been slashed from $5.96/share to $4.79/share in just the past 60 days.

Exxon Mobil is a Zacks Rank #5 (Strong Sell).

Oil and Gas is a particularly difficult industry right now, but investors who are intent on some exposure would be better off with production pipeline companies like Valero Energy partners LP (VLP) or Shell Midstream Partners LP (SHLX - Free Report) , both of which carry a Zacks Rank #1 (Strong Buy).

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