Exxon Mobil Corporation (XOM), Royal Dutch Shell plc (ADR) (RDS.B): A Bitter Pill To Swallow – Here’s Why You Should Be Cautious about Oil

What is invaluable at this moment is efficiency, and Shell is beaten in metrics which evaluate efficiency such as return on equity and operating margin. Unless and until the company can minimize shutdowns and oil theft in Nigeria, low values for these metrics will continue to dent investor confidence.

The important factor while investing in oil stocks is that a single quarter must not be interpreted out of context as short-selling is not the prime objective. That being said, while Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) have not performed particularly well in the latest quarter, their long term perspectives are secure because of the company’s investment into future production of oil and LNG. Chevron in particular has already spent a significant amount of money in the second quarter of 2013 to initiate new projects for the future. That being said, Exxon Mobil can also not be discounted due to the vastness of operations and earnings smoothing which come along with it.

Verdict

Energy price forecasts are highly uncertain, and the current values of futures and options contracts suggest that prices could differ significantly from the forecast levels. Unfortunately, these are also the single largest factor which determine an oil company’s earnings and consequent performance on the stock market. Demand for oil should grow a little slower than the global economy. Unless the world starts to boom—an unlikely scenario, given problems in Europe and the United States—production capacity will grow faster than demand, pulling prices down. For this reason, it is important to remain cautious about the prospects of oil stocks in the long run. I’d advise holding the three stocks despite Shell’s phenomenal dividend payout – a bitter pill to swallow.

The article A Bitter Pill To Swallow – Here’s Why You Should Be Cautious about Oil originally appeared on Fool.com and is written by Awais Malik.

Awais Malik has no position in any stocks mentioned. The Motley Fool recommends Chevron. Awais is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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