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postcards from the florida republic
An independent and profitable state of mind.
When you’re 42 years old in Florida, you’re usually the youngest person at the breakfast counter by a good 25 years…
Today I ordered an omelet, some gluten-free toast, an iced tea… and a conversation with a retiree named Mike on the most important trend in finance today.
I’ll admit I think I might’ve blown his mind a bit when I named my top pick, but Mike was is a sharp guy and he quickly got where I was coming from.
I think you will, too…
It’s Not Just About ChatGPT
Mike was a former plumber in New Jersey and served 21 years as a firefighter. We’re a blue-collar retirement town. He moved here in 2007.
“It was a lot less crowded back then…” he said.
I remember. I moved for a year after I left Wall Street in 2008. The population increased by 20% from 2010 to 2020. It’s up another 6% three years later.
Mike asked me what I do. When I explained… this, he pounced.
“So, what do you think of all this AI stuff?” he asked.
I didn’t go into my recent argument about AI and the Nasdaq.
Instead, I asked him what he thought AI provided for investors.
He mentioned ChatGPT – which he read about in Barron’s. He said his grandson, a graphic designer, might need a new job.
So, I asked him what stocks he owned. He owned Apple (AAPL)… Amazon.com (AMZN)… General Electric (GE)… Altria (MO) (“for the dividend”)… and Exxon Mobil (XOM).
Ah. Exxon Mobil.
“Exxon Mobil is a perfect artificial intelligence stock, Mike…”
Mike now looked like a confused Jack Lemmon… a sideways face.
Maybe you’re feeling the same, Fellow Expatriate – let me explain…
How is Exxon Mobil an Artificial Intelligence Stock?
Today, everyone thinks that artificial intelligence is all MidJourney, ChatGPT, and justification for computer chips.
But artificial intelligence will be critical to the future of the oil and gas industry. It’s all about reducing costs, increasing margins, and delivering more value to stakeholders.
Here are five ways that Exxon will benefit from AI in the future.
1. Optimizing Production
AI will help optimize oil extraction by analyzing a massive amount of data sourced from geological surveys, sensors, and production sites.
Even though Exxon has some brilliant mathematicians and engineers, AI will be smarter and faster over time, building algorithms that can identify successful correlations and patterns to boost output and reduce costs in the process.
We can anticipate that AI will enhance reservoir management practices, slash energy input use and costs, and increase extraction rates. By optimizing production, Exxon will improve margins and reduce its production costs.
Remember, they want to reduce oil production costs to $15 per barrel in the Permian in the future. AI can make that happen.
2. Optimizing Maintenance
The term “predictive maintenance” might not be familiar to most investors. But what if you can tell when a production rig is about to fail, or a critical machine might break before it happens? That’s the magic of predictive maintenance.
AI will measure important metrics like air pressure, surface temperature, and vibration readings. AI can predict equipment failures before they happen, allowing engineers to repair and replace them on the fly.
This will reduce downtime in the fields, helping to keep production humming. This can boost revenue and optimize asset management.
3. Safety and Risk Optimization
AI will enhance safety and risk management. This will not only bring a sigh of relief to employees (operating in dangerous conditions), but it will also bring relief to regulatory agencies overseeing their industry.
Think of all that regulations around the environment, safety hazards, and anything related to equipment requirements. In addition, AI will require less waiting time to measure risk scenarios. This is critical to reducing liability in this industry. If AI can increase the security of pipelines, reduce ocean-platform security, and enhance safety in transportation, it will online protect and boost margins in the industry.
4. Supply Chain Optimization
I mentioned pipelines. Remember, the oil-and-gas sector consists of Upstream, Midstream, and Downstream operations. For companies that aren’t vertically integrated, it can be a challenge to optimize transportation routes, measure inventory levels, and – enhance their demand forecasts downstream to the customer.
AI can examine everything from levels of fuel in storage facilities (inventory management), identify arbitrage opportunities, and reduce operational costs. The goal is to prevent the whipsawing of prices and inventory in the supply chain, which can streamline costs. In addition, companies may be able to improve and better predict future margins – which will help Wall Street analysts (assuming they still have a job) forecast the business and industries in the future.
5. Energy and Waste Optimization
I anticipate that energy optimization will be the big-ticket item for AI across all sectors. But the ability to reduce energy consumption in drilling and transportation will be dramatic if AI can unlock that potential. In drilling, companies that pull too much from the ground are overextending their input costs.
But when they pull too much from the ground and can't get that oil out of the fields – the result is too much fuel – which becomes waste. And where there is waste – especially in the natural gas field – there is flaring.
And that's just lighting fuel on fire and burning it. That has not only environmental costs but also lost potential revenue for a company. AI's production optimization potential is one more thing that will produce environmental efficiencies.
But that's not all. AI will help drive greater energy efficiency across all industries, saving an untold amount of oil, gas, and other fuels for future usage.
I've only discussed five potential benefits of AI. There are others – fraud detection, decision support, and exploration modeling. But those five were enough to convince Mike that Exxon is a sound investment for the long-term and that he doesn't need to buy NVIDIA (NVDA) at its overstretched valuations to take part in the AI revolution.
To your wealth,
Florida Republic Capital (Available on Substack)
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.