As we seen $XOM
hit new highs these days, let's not forget the 2016-2020 commodities downcycle times when people thought that these oil giants would cut their dividends. At the time, these thoughts were rational as the US was in the middle of the shale boom and the US, OPEC, and Russia were in the middle of a price war against each other. When the lockdowns happened, we saw oil hit negative territory and the idea of people not needing to commute and being stuck at home made the idea of low oil prices being the norm rational.
Fast forward to today, the world is concerned with energy security. Oil prices are very high. Demand for energy is insatiable. Energy stocks are making huge profits and the market is having trouble keeping up with their growing profitability, buybacks, and dividend hikes. Will oil stocks continue to go higher? Possibly, when considering the fact that we haven't seen the commodities to equity ratio spike (yet). Since energy companies are more focused on rewarding shareholders than on increasing production and capitalizing on the high prices, clearly there is still immense fear on the sudden reversal of commodities prices from energy executives. Personally, I think that there's much more room for commodities prices to go higher.
Now going back to the telecoms. As I've written in previous memos, I believe that the telecom giants of today will replace the role that cable companies have played in society. We will start receiving more of our entertainment from streaming than from cable television. We still start receiving more of our broadband service from telecom companies and fiber builders than from cable broadband providers. Instead of the cable companies bundling phone, internet, and cable entertainment, the telecom companies will be bundling phone, internet, and streaming services. $T
may have depressed stock prices because of concerns with their leveraged balance sheets and a lawsuit about lead cables but I believe that these issues are less worrisome because the businesses are stable, they generate tons of free cash flow, and the legal liabilities are less impactful than people realize. With 5G service being ramped up, people are going to start paying more for telecom service, which means higher ARPU for these telecom giants.
- Energy stocks will have more room to go higher because the commodities-to-equity ratio remains at historic lows and commodities companies are still fearful (evidenced by historically low capex spending despite a surge in prices)
- Telecom companies were once like energy stocks during the last commodities downcycle and there are reasons to be optimistic on their rebound in the future