So if we're fairly sure XOM will crater and die just before or after oil demand peaks, and we know oil demand is going to peak between 2021 and 2026, how does one go about shorting this trip to zero most effectively(and relatively simply)?
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XOM $400B to Zero
- Thread starter TheTalkingMule
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Crude will follow coal and gas will follow crude. Are we not all agreed on this?
A future for XOM after fossil transportation is very unlikely, a future after home/grid storage hits it's stride is unthinkable.
It's not like we're even remotely done with coal yet.....
A future for XOM after fossil transportation is very unlikely, a future after home/grid storage hits it's stride is unthinkable.
It's not like we're even remotely done with coal yet.....
A caveat to the OP and anyone looking to follow this course of action, whether with an oil major, a refiner, a hydrocarbon ETF or other such:
XOM, for example, currently has a 3.94% dividend yield. A naked short sale encumbers the short seller with making good on that dividend. It is possible to think of dividends as being a CYA tactic by imperiled companies as shortshark medicine. I'm not saying that is a compelling reason for a corporation to pay a dividend....but what a fine dividend it thereupon yields to such firms!
You may take this to heart when considering ICE makers as well, by the way. At present, F yields 5.57%, GM 4.35% and BMW 4.10%
XOM, for example, currently has a 3.94% dividend yield. A naked short sale encumbers the short seller with making good on that dividend. It is possible to think of dividends as being a CYA tactic by imperiled companies as shortshark medicine. I'm not saying that is a compelling reason for a corporation to pay a dividend....but what a fine dividend it thereupon yields to such firms!
You may take this to heart when considering ICE makers as well, by the way. At present, F yields 5.57%, GM 4.35% and BMW 4.10%
70% of crude goes to transport in the US. Are you implying there's a plan for XOM after that goes away? Pesticides, fertilizers, and plastics are all well and good but even those uses may peak in short order as they fall out of favor.
Is the peak and decline of oil extraction going to be vastly different than that of coal? Obviously there are far more residual uses for oil & gas, but it's still a good 70% of the market that goes rapidly to nothing.
On the other hand, oil and gas seem to be infinitely more leveraged, so perhaps the nosedive will be just as rapid as their model crumbles under it's on weight.
I'll say it again, you have a shallow view of XOM's business.
There is a story they tell in business class.
In 1900, companies that made horse carriages are virtually gone today, and it was a huge industry.
In 1900, companies that made transportation devices are still here even though 90% of their sales were buggies.
If Exxon is an energy company, not just an oil producer, they will survive. It takes planning and management.
Apple was virtually bankrupt as a desktop computer company. When they decided to become a consumer technology company, they thrived.
In 1900, companies that made horse carriages are virtually gone today, and it was a huge industry.
In 1900, companies that made transportation devices are still here even though 90% of their sales were buggies.
If Exxon is an energy company, not just an oil producer, they will survive. It takes planning and management.
Apple was virtually bankrupt as a desktop computer company. When they decided to become a consumer technology company, they thrived.
deonb
Active Member
Can do a synthetic short to avoid that. (i.e. Sell a atm naked call and use the proceeds to buy a put at the same strike & expiration.)
Basically the same risk/rewards/margin requirements as a standard short sell, but you don't have to pay dividends.
ValueAnalyst
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This, but also, oil demand growth peak does not equal oil peak.
Oil demand will grow robustly this year and next, and if Tesla can bring online its Gigafactories 3-6 to full capacity by 2021, oil demand growth will slow. Oil demand itself will not peak until 2035.
Keep in mind that oil supply will grow slower than oil demand for the foreseeable future and inventories are already shrinking fast.
So I guess if OP is happy with a 100% return in two decades with occasional short squeeze risk, then go ahead short XOM
If the could diversify from say oil into only gas and make profits that would work, but the idea of XOM shifting into anything involved in the new energy dynamic seems to me unlikely.
They're stuck with the same issue as the Saudis. They want to diversify, but doing so would expedite the demise of their legacy lines of business. XOM explores, extracts and delivers crude....they're not about to move into batteries or wind or solar with any sincere effort.
you just don't seem to get it, I suggest doing some in depth research before you start to throw your money at your notions
I decided it wasn't possible. Remember I predicted some years ago that XOM would go bankrupt by 2030. I sold all my XOM stock back in 2008. However, I do not see a reasonable way to short it and make money. Shorting has carrying costs which would be excessive over the 4 year timeframe to 2021, puts aren't available out that far, etc.
It is quite possible to be sure that something is going to happen and have no good way to make money on that bet.
I do see a potential trade in the oil futures markets, which I am not making. Oil futures are available out to 2025. Sell for $55/barrel for delivery in 2025, and when 2025 comes, cover for some much lower price. I'm not comfortable doing this as a year's delay or temporary price spike could screw the trade. If 2027 futures come out and these high prices are still going on, it becomes even more tempting.
there is so much wrong with your theory I don't know where to begin. for starters how much will it cost you to initiate and carry this position? especially as the markets gyrate in the coming years.
Sorry, you've obviously never studied XOM at all. I owned the stock for years and studied it intensively. Their future is absolutely tied to gasoline and diesel demand for transportation fuel, period. They're dead without it.
Shell is another matter, as is Total. Not *all* the oil companies are in the same position.
XOM, however, is most firmly planted in the past and inacapable of change. (Perhaps only CVX is worse.) I think it's a corporate culture thing: they are very definitely making the decision to fail. They keep throwing money at exploration, which has been a waste of money since at least 2008. They are not diversifying and don't know how to. They continue to throw money at gasoline & diesel refining, as well, which is also money burnt.
The only division of XOM which will survive the coming shakeout is petrochemicals / plastics, and it's just too small. Even though they're the #5 petrochemical company in the world, they've got both bigger and better competitors, and it's not going to protect them from the writedowns in the rest of the business. If I were buying a petrochem company, I'd go for BASF or Dow. Downsizing to a petrochem/plastics company would slash XOM's revenue by about 85%, and they're too indebted to survive that without going bankrupt.
XOM is a company which is routinely borrowing money to pay a dividend. That's always an absolutely terrible sign, and moves them closer to bankruptcy every year.
This is probably rational for the execs, who want to continue to shovel their free (no real work required) multimillions of dollars every year out of the company and into their own pockets, and don't really care if the company fails. Peabody Coal executives made millions from the bankruptcy of Peabody and I have no doubt that the execs who oversee ExxonMobil's bankruptcy will also make huge amounts of money out of it. Rex Tillerson, in a genius move, managed to get out of his long-term XOM stockholdings -- which he wasn't *allowed* to sell for 10 years -- by claiming that he needed permission to do so in order to become Secretary of State. The Board bought it and Tillerson liquidated his entire position -- he got out while the getting is good.
XOM is a dead company walking. That doesn't mean it's possible to bet against it; I suspect it's not possible to make a reasonable bet against it due to carrying costs and expiration dates. Best you can do is make sure you don't own the stock.
Well, obviously, you'd have to have piles of cash to hold the position, due to the funny way the futures market operates. Additional capital of twice the position size should be plenty to ride out the gyrations and should eliminate carrying costs entirely. But the opportunity cost is serious. It's not a good rate of return over a long period due to the very high capital you have to put up; you would really only be making about 4% per year.
This is why I said that a temporary price spike would screw the trade. If you're sure there won't be a price spike, you can put up less cash and get a better rate of return, but I'm not at all sure about that.
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JHM and I disagree with you on the timing. There is an entire thread of discussion and analysis about this, under the misleading name "shorting oil, hedging tesla". The number I look at is when yearly demand destruction (from EVs etc.) minus demand growth (from population growth) exceeds natural supply decline (from the natural decline of oil fields as they deplete). It's a tricky number to estimate but it's very definitely going to be before 2030, and we're currently thinking 2023 (maybe 2025).
The actual demand peak in fact comes before that, when yearly demand destruction exceeds demand growth; but not much before that. The decline rate of the fields is only 4%-10% with the exception of shale, while demand destruction is doubling every two years; 0.90 or 0.96 is so much smaller than 1.4 that it's going to be the same year, most likely, unless the collapse of shale causes large supply destruction in a particular year.
Tesla is not the only company involved in this; there are a substantial number of Chinese companies. I believe as the success of Tesla becomes apparent in 2018, there will be a flood of investment capital into the sector which will keep the EV production growth rate up.
However, the oil companies do not go bankrupt immediately when peak demand hits. It takes a decade or more.
Yeah, even at 13 years, it's just too long-term to take a short position. You get poor returns on an annualized basis.So I guess if OP is happy with a 100% return in two decades with occasional short squeeze risk, then go ahead short XOM
Write some calls on XOM and hedge a bit with Dow / BASF. Keep writing / rolling calls. Pretty sure XOM is not a takeover candidate.
Edit: make sure the calls are somewhat out of the money, so that shares are not called away before the dividend payout.
