In a move that surprised just about everyone this week, President-elect Donald Trump named Rex Tillerson, CEO of ExxonMobil(NYSE: XOM), to be his Secretary of State.
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In this week's episode of Industry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckerman look at why Tillerson probably took the job, and what he has to bring to the position. Also, the hosts look at Rick Perry, Trump's pick for the head of the Department of Energy.
Finally, an update on the latest chapter of OPEC's production cut -- what it means that OPEC has roped 11 non-OPEC countries into the cut along with them, and what effect this will have on the oil industry at large.
A full transcript follows the video.
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This podcast was recorded on Dec. 15, 2016.
Sean O'Reilly:Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, Dec. 15, 2016, so we're talking about energy, materials, and industrials. I am your host, Sean O'Reilly, and I am joined in studio by the incomparable, the devilishly handsome, Mr. Taylor Muckerman. How's it going?
Taylor Muckerman: Keep it coming.
O'Reilly: I mostly said that because of your sweater.
Muckerman: Oh, thanks.
O'Reilly: You look stylish. But,you kind of had to wear it because of this wind,right?
Muckerman: Yeah, yeah,
O'Reilly: I hate to talk about the weather, but my walk over here was terrible.
Muckerman: Yeah,what was it, like, three minutes outside?
O'Reilly: It was seven!
Muckerman: Seven, OK. That's fair, I'll give you that.
O'Reilly: It was unpleasant. So this is going to be anExxonMobil-focused episode, I guess.
Muckerman: They're in the news, if you follow energy, they're in the news for multiple reasons.
O'Reilly: Folks, we have no choice. Real quick, though, we have to talk about OPEC roping in non-OPEC producers like Mexico and Russia to cut production. Walk us through it.
Muckerman: Over the weekend, energy markets got a boost by Russia and, like you said, I think it was up to 11 non-OPEC producers agreeing to cut back on production. But again, we're talking about countries that, like Russia, were producing at all-time or multi-decade highs. So they're cuttingfrom a position of strength. When you look at Mexico, they'renot really cutting; they're just not going to tryproducing anymore, they're just going to let the natural decline cut into production.
O'Reilly: Is the tail here with the OPEC cut not actually a cut? It's more like a simmer down? Like, "Everybody simmer down."
Muckerman: Yeah, basically. But then, you also look at, I read a funny quote, I talked about it on Monday on MarketFoolery, the former oil minister of Saudi Arabia basically said, "We cheat," talking about OPEC countries, because they self-report all of this. So will they or won't they actually --
O'Reilly: Saudi Arabia is going to walk on over to all these countries and check out how much oil they're producing? Come on.
Muckerman: Exactly. They're not going to have a foreign inspector there at every single oil derrick in these countries. And you look at the statistics, when they have announced cuts in the past, they haven't actually cut as much as they state.
O'Reilly: There was some statistic, like, historically every time OPEC cuts, it actually winds up being in reality like 60%-80%. I'm totally --
Muckerman: Yeah, I think the average was, like, 60% of the way there.
Muckerman: What'd they say, they bring off almost 1.5 million barrels a day of capacity. Take 60% of that. You're not quite there; even if 1.5 million barrels a day isn't all that meaningful, you're going to take even less off.
O'Reilly: Yeah, oil prices popped on Monday, but they're not doing so hot today.
Muckerman: They did; they popped on Monday, and they're back down below $50 a barrel today.
O'Reilly: On WGI, right?
Muckerman: Yes. You look at it from the aspect of, holy crap, America has ridiculous inventories -- we just found that this week -- holy crap, the dollar is strengthening like crazy thanks to the rate hikes.
O'Reilly: I'm going to Europe.
Muckerman: And oil is sold on a dollar-denominated bases, so if the dollarstrengthens --
O'Reilly: That's bad.
Muckerman: -- peoplecan't buy as much oilglobally,so demand goes down. So you're saying economicscome back into play, rather than just,I don't know what you would call it, cartelonomics.
O'Reilly: So,moving on,Donald Trump made an interesting pickfor his administration --
Muckerman: Acouple, but we'll get into the biggest one first.
O'Reilly: Rex Tillerson, the CEO of ExxonMobil,for Secretary of State. Like, this is the job that Thomas Jeffersonhad under George Washington. It's Rex Tillerson.
Muckerman: Well, history.
O'Reilly: I'm sorry, do you not appreciate the historical references?
Muckerman: No, it's great,I was excited. That's why I dropped a bomb.Acknowledgement bomb.
O'Reilly: Oh, OK. But,seriously, why is this being done? Were you surprised? Is it humorous?
Muckerman: I think everybody was surprised.
O'Reilly: Why did he take the job? Was he bored?
Muckerman: Well,he's not bored at the moment,but he did announce he was retiring inMarch of 2017. That has been known. So he'sout of a job in a few months; why not become the Secretary of State for a few years?
O'Reilly: Why not?
Muckerman: Andthis was interesting -- I didn't realize thisuntil I started doing some reading on the subject, but you can't be CEO ofExxon beyond the age of 65. It'smandatory retirement.
O'Reilly: That seems a little old-school anddraconian. Correct me?
Muckerman: Yeah, no doubt.I haven't ever seen a mandatory retirement age, other thanthe Supreme Court.
O'Reilly: I mean, Buffett is 84, he was born in '32.
Muckerman: Yeah, and he's still rocking. So, yeah, he was done in March --
O'Reilly: Can youimagineBerkshire Hathawaytodayif Buffett was forced to retire --
Muckerman: Well, Buffett wouldn't retire,because he would be forcing himself to retire byinstalling a mandatory retirement age.
O'Reilly: Listeners,if you're just listening on your phones, with just the audio,I have a look of sincere shock on my face.
Muckerman: I did, too. I read that, and it was like,I've never seen that before. But regardless,he was out of a job. But if you look at what Exxon has done since he was CEO,and even before, because this is the only company he's ever worked for,he was with Exxon before it merged with Mobil and becamewhat we know it today as. He's a dealmaker around the globe. That'spretty much why I think he was selected. Exxonproduces oil in every continent except Antarctica and has offices or has cut dealsin every major country around the world,and he's been a big part of that.
O'Reilly: So,a lot of people are in uproar, like, "Oh, they'repicking him because he has ties to Russiaand Putin and all this stuff --"
Muckerman: Well, sure he does, because Exxon has apretty significant amount of their future business in Russia, but it's being frozenright now due to sanctions.
O'Reilly: Sure.I like the rebuttal --obviously, we're not political here,I'm just saying --I was reading yesterdaythat Henry Kissinger, the Secretary of State under Nixon, he was saying, it's ridiculous, he would be useless to ExxonMobil were henot good at dealing with Russia and making oil deals and stuff, so,completely irrelevant.
Muckerman: I don't know how long they've been dealing with Russia,but I'm pretty sure he has not spent his whole career dealing with Russia.
O'Reilly: Well, no,certainly not.
Muckerman: So, he's obviously beensuccessful outside of Siberia.
O'Reilly: InSoviet Russia, oil drills for you.
Muckerman: He did say thatclimate change is serious and warrants thoughtful action. So he's not a climate-change denier. But,obviously, you would imagine,if push comes to shove, he's going to havethe fossil-fuel industry's back. It's not a bad thing for thefossil fuel industry that he is Secretary of State. It'san asymmetric to the good side.
O'Reilly: He gotendorsed byCondoleezza Rice. He got a number of very decentendorsements.
Muckerman: Yeah,I guess she was too happy teaching at Stanfordto come out of retirement.
O'Reilly: What is going on here?So, Mr. Muckerman, we got a pivot from Rex Tillerson, now-former CEO --
Muckerman: Well,it takes effect Jan. 1.
O'Reilly: AndTrump doesn't get sworn in until Jan. 20, so. Trump named Rick Perry,former governor of Texas --
Muckerman: Longtime governor.
O'Reilly: I was going to say, I do believe he has the record for the longest-serving governor of Texas.
Muckerman: Yeah, 15 years or something like that.
O'Reilly: As the head of theDepartment of Energy.
Muckerman: Yeah, Secretary of Energy.
O'Reilly: Unsurprising that you pick a guy from Texas for the Department of Energy, but ...
Muckerman: But when he was running for president, in the 2011 debate,it was the department that he famously forgotthat he was going to try and dismantleshould he win the election.
O'Reilly: Do you thinkit's going to be awkward for him to walk into the Department of Energy? Like, "Hi guys ... "
Muckerman: "Remember me? I love you guys,I'm going to be a great boss!" No, that'sdefinitely an interesting pick. Coming from Texas, again, you would think Rex Tillerson, oil, oil, oil, natural gas, natural gas, natural gas. You think, Perry, Texas, same thing. But they've actually been boosting their renewable production of energy.
O'Reilly: Yeah,as we have covered, Texashas all that wind,and God knows they have sun.
Muckerman: Yeah, they've been diving headfirst into solar. I think, like, 16% of theirenergy production in April this year came from wind,enough to power 4 million homes. So it's more diverse than most people mightimagine Texas being. Though it's still the No. 1 oil-producing state in the union.
O'Reilly: Yeah. So I'm not suggesting that Mr. Perrywas not being genuinein 2011 and 2012,because everybody is like, "Hewanted to dismantle this agency,he said it needed to go away," I have to wonder --
Muckerman: Just like the new head of the EPA.
O'Reilly: -- things get said in elections.
Muckerman: Yes, they do.
O'Reilly: AndI had to wonder, does he actually ... you know?
Muckerman: Well, how serious could he be about it if he forgot that it's one of the departments he wanted to dismantle? He's probably very serious,maybe not quite as serious. But I mean, he forgot about it. Soit wasn't top of mind. Granted, heprobably had a lot on his mindin the debate. But it's interesting, but he has experience. He's not a Nobel Prize winner likeprevious Secretaries of Energy,or a physicist, or anything like that --
O'Reilly: Oh, really? I didn't know that.
Muckerman: Yeah,I think before, Ernest Moniz, Secretary Steven Chu --
O'Reilly: Oh, wow,literally a rocket scientist.
Muckerman: Yeah, he was a Nobel laureate.
O'Reilly: I forget the prime minister, but there was this jokea couple years ago that was like, "India's prime minister for a couple years was literally a rocket scientist," and it was like, ha-ha.
Muckerman: Yeah,smart people in smart positions.
O'Reilly: But I digress. Bringingit back around to our Exxon-themedepisode, talk to me about the new CEO.
Muckerman: Yeah, Darren Woods. He's been company president for a few months now. He was the natural successor, he's been groomed for this role. He has 14 years before he'll be forced to retire.
O'Reilly: I wasn't going to ask, but I was thinking it.
Muckerman: Yeah. He's 51, so he has some time there. Interestingly, he's from the downstreamchemicals refining side of the business, which --
O'Reilly: Futuristic, high-margin.
Muckerman: Yeah, and it's been buoying the business lately. If high oil prices don't come back to what they were five to 10 years ago, like, if you see $60, $70 as the ceiling, then downstream is going to be very meaningful for this company moving forward.
O'Reilly: Correct me if I'm wrong, but that's what Saudi Arabia, withSaudi Aramco's IPO islooking at. They want to build up that part of Aramco's business.
Muckerman: Yeah,and then reduce their own dependence on oil for energy, and then dump all the oil that they're not using for that into the chemicals and refining business. Basically, everything you touch isimpacted by the chemicals and refining business.
O'Reilly: Right, this laptop, this stuff --
Muckerman: Plastics, rubber. Granted,there are some new technologies out there whereit's not necessary, but you'd better darn well believe that 80% of what you see in a bedroom or a kitchen or something ...
O'Reilly: It's likein The Graduate, when the dad is like, "Get into plastics!"
Muckerman: Yeah, "Plastics, plastics, plastics. I got one word for you," and he says it three times. It's not dead yet, and it wasactually probably pretty prescient back then.
O'Reilly: Is that when he's floating in the pool?
Muckerman: No, that's when he runs outside behind the house during his graduation party, because he doesn't want to talk to anybody. When he's floating in the pool, he's not listening to anybody.
O'Reilly: That's right, and he's like, "You need to get a job, son." So,bringing it back around, I'm sure we have a few, at least,ExxonMobil shareholders listening.
Muckerman: Not least among them, Rex Tillerson, who owns over $200 million in shares.
O'Reilly: Right. We know you're listening, Rex! Are you feeling pretty good? Dividends looking good? Downstream?
Muckerman: Yeah.Dividends are good, downstream is carrying the loadalong with the chemical side of the business.
O'Reilly: Does this make you more bullish than you would have been a month ago? Doyou know what I mean, more optimistic?
Muckerman: Well, yeah, because their former CEO is the potential Secretary of State,so if anything gets repealed or eased in Russia sanctions-wise, significant portion of Exxon's potential future production is based there. So if anything gets freed up,that will be a boon. The new CEO has worked with downstream most of his career,so I think that's positive for this company. And,unlike previous CEOs, whopretty much all came from the upstream. So maybe bringing a slightly different viewpoint. Butmost people think it will be business as usual,at least right away.
O'Reilly: Well, andsuch a huge company, I mean, running ExxonMobil is likerunning a small country.
Muckerman: Yeah, he's not going to come in and makedramatic changes right away,and I doubt that he will in general.I wouldn't be surprised, though, to see him make an acquisition, like, hisacquisition to get things running --
O'Reilly:Shoot the cannon.
Muckerman: "Here I am, world." That wouldn't surprise me. Probably not right away. But it's not like the market is overpriced right now.
O'Reilly: Right. Cool. Well, thanks for your thoughts, Taylor. Have a good one.
Muckerman: Yeah, man! I appreciate it.
O'Reilly: That is it for us, folks. Be sure and tune in tomorrow for the Industry Focus: Technology show. If you're a loyal listeners and have questions orcomments, we would love to hear from you, just email us at email@example.com. Once again, that is firstname.lastname@example.org. As always,people on this program may have interestin the stock that they talk about,and The Motley Fool may have formal recommendations for or against those stocks,so don't buy or sell anything based solely on what you hearon this program. For Taylor Muckerman, I am Sean O'Reilly. Thanks for listening and Fool on!
Sean O'Reilly has no position in any stocks mentioned. Taylor Muckermanhas no position in any stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.