Is Exxon Mobil Stock a Good Investment for 2018?

Although it's rebounded 4.2% since September, we don't recommend buying Exxon Mobil stock for 2018.

exxon mobil stockInstead, Money Morning Global Energy Strategist Dr. Kent Moors has picked a smaller oil stock that could benefit from a $1 trillion oil boom happening right here in the United States. This boom deals with one region of the country that has about as much oil as all of China.

Exxon Mobil Inc.'s (NYSE: XOM) 4% rebound over the last month can be attributed to the plunging U.S. dollar...

You see, Exxon had non-U.S. operations earning roughly $6.6 billion in the first half of 2017. When the company brings that foreign cash back to the United States, it's converted to dollars. If the dollar is stronger against other currencies, that bottom line can be much lower than expected.

Now that the dollar is extremely weak, investors think it signals more cash - and stronger earnings - ahead. The U.S. Dollar Index (DXY) - which pegs the dollar against the euro, yen, and several other currencies - fell to a 32-month low on Sept. 8. Since then, shares of XOM stock are up 4.7% to $82.55 today.

And that isn't the only reason we are not recommending Exxon Mobil stock today. In fact, there is one major problem on the company's balance sheet that's the biggest warning sign of all...

1 Big Reason Why Exxon Mobil Stock Is Dangerous to Own

Like other oil supermajors, Exxon Mobil's extremely high debt makes it a risky oil stock to buy right now.

From 2006 to 2016, Big Oil companies - like Exxon, Royal Dutch Shell Plc. (NYSE ADR: RDS.A), and Chevron Corp. (NYSE: CVX) - saw their debt levels increase tenfold.

Kent's research indicates this largely stemmed from oil's 46.5% crash between 2014 and 2016. That price crash also cut the firms' return on drilling projects from 22% to 7% between 2006 and 2016.

What Is the Debt/Equity (D/E) Ratio?

The D/E ratio measures how much a firm is borrowing money to fund its operations or projects. A high D/E ratio shows the firm is aggressively growing its business with debt, which can result in poor earnings since the company is taking on high interest expenses.

For instance, let's say the total value of a firm's stock is $150,000, and that firm has $800,000 in debt. Its D/E ratio would be 5.33, meaning the firm is a very high risk since its debt outweighs the company's value to the public by 533%.

If the cost of debt becomes too much for the firm to deal with, it can potentially lead to bankruptcy. This would leave the firm's shareholders penniless.

But Exxon's debt is much worse than the rest of the energy sector...

According to the latest data from stock researcher CSI Market, the entire energy sector's average debt/equity (D/E) ratio - which measures how much debt companies use to finance their business - is 0.06.

Meanwhile, Exxon's D/E ratio is nearly quadruple that, at 0.23. It's steadily climbed over the last three years, up from 0.12 in June 2014.

Taking on high levels of debt can temporarily boost earnings, but this strategy hasn't been successful for Exxon. As the D/E ratio has nearly doubled since June 2014, Exxon's annual profits have declined a massive 76% from 2014 to 2016.

With its debt levels continuing to outpace earnings, it's clear Exxon's business isn't growing right now even as oil prices are back above $50. That's why we advise against investing in Exxon Mobil stock.

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That's why Kent - a globally recognized energy expert with over 40 years of experience - is recommending a different oil stock to buy today.

It's a midstream master limited partnership (MLP), which is a company that stores and transports oil. This type of "middleman" company makes money as long as oil keeps flowing from the producer to the seller, meaning it's hardly affected by oil price fluctuations.

But Kent also likes this firm because it's at the center of an oil revolution, which could yield upward of $1 trillion to the companies that get to it first...

The Best Oil Stock to Buy to Profit from This $1 Trillion Oil Boom

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One of Kent's favorite oil stocks to buy also happens to boast a strong dividend - Magellan Midstream Partners LP (NYSE: MMP).

Magellan is a master limited partnership (MLP), meaning it makes 90% of its revenue from oil and operates in the midstream sector. In other words, it stores and transports oil instead of producing (upstream) or selling (downstream) it.

Since MLPs only rely on transporting and storing oil, they make money regardless of how oil prices are moving. As long as the oil keeps flowing, companies like Magellan keep raking in revenue.

The WTI crude oil price fell 9% during the second quarter. Meanwhile, Magellan posted an operating profit of $261.5 million - up 15.5% from $226.5 million in the year-ago quarter.

But one reason we particularly like Magellan is its strong presence in the $1 trillion "Permania" oil boom...

"Permania" refers to the output growth happening right now in the Permian Basin, which stretches across New Mexico and Texas. It's become the largest producing U.S. basin, holding more than 20 billion barrels of oil. That means just one region of the United States has nearly as much oil as all of China.

Since Magellan is one of North America's largest oil transporters, with 10,000 miles of pipelines, it's set to earn millions from this massive oil boom. The firm is also adding about 1.7 million barrels of new oil capacity to its pipelines that stretch from the Permian to its Gulf Coast facilities.

This new capacity will open up more profits for Magellan in 2018. The company already has a huge 34% profit margin. As revenue increases from the Permian boom, the firm's big profit margin ensures profits will increase as well.

And the MMP dividend makes it an even stronger stock to own. It currently boasts an annual dividend of $3.48 for a yield of 5%. That's more than double the average 1.9% yield of the entire S&P 500.

The Bottom Line: As the largest U.S. oil company, Exxon Mobil is one of the first oil stocks that comes to mind. But we recommend avoiding XOM stock since the company's debt levels should keep outpacing its rapidly declining earnings. Instead, consider adding MMP stock to your portfolio. Magellan Midstream Partner's growing pipeline capacity ensure the firm becomes one of the biggest beneficiaries of the $1 trillion Permania oil boom.

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