Petroleum & Prudence

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The current enthusiasm for hydrocarbons, one observes, is predicated on a rather vulgar calculation. The Strait of Hormuz, that narrow, strategically tiresome waterway, is once again the focus of anxious speculation. Iran’s pronouncements regarding its control of this chokepoint are, naturally, treated with the gravity they deserve – which is to say, the gravity accorded to the pronouncements of any power attempting to exert leverage through theatrical menace. The market, predictably, has responded with a flutter of optimism, anticipating prices above ninety dollars a barrel well into 2026. Barclays, Goldman, and Macquarie offer their estimates with the solemnity of priests divining the future from tea leaves. One suspects they are merely stating the obvious.

The notion that this is a temporary inconvenience, a mere ‘spike’ as the optimists have it, is frankly naive. Three factors conspire to suggest a more protracted period of elevated prices. Firstly, a disruption at Hormuz is not akin to a pipeline fracture, swiftly remedied by competent engineers. Commercial shipping, ever cautious, is already withdrawing from the region, and the subsequent re-routing of tankers, the renegotiation of insurance premiums, will be a process measured in months, not weeks. Secondly, the Strategic Petroleum Reserve, once a reassuring bulwark against such contingencies, is, shall we say, depleted. The Americans, having squandered their reserves on various geopolitical adventures, find themselves less able to smooth over unpleasantness. And thirdly, even before the current drama unfolded, the price of crude was already exhibiting a distinct upward trajectory. The fundamentals, one gathers, were tightening, even without the benefit of Iranian posturing.

ExxonMobil: A Machine of Limited Charm

ExxonMobil, currently trading at $156.12, has already enjoyed a rather gratifying surge this year. The company’s performance, one must concede, is underpinned by a genuine earnings engine. Full-year 2025 free cash flow reached $23.6 billion, achieved at crude prices considerably below the current level. They produced an impressive 4.7 million oil-equivalent barrels per day, largely thanks to their assets in the Permian Basin, Guyana, and the burgeoning LNG market. The Golden Pass LNG facility, due to come on stream in early 2026, promises a further injection of revenue at a most opportune moment. The dividend, predictably, remains robust, having enjoyed 43 consecutive years of growth. At the current price, the yield is a modest 2.64%. One might describe it as reliably uninspired.

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Devon Energy: A Merger and a Prayer

Devon Energy, trading at $46.25, has also benefited from the prevailing optimism. The company’s trailing P/E ratio of 11x suggests a degree of undervaluation, and analysts, ever hopeful, have a consensus price target of $51.50. The near-term catalyst is the impending closure of the Coterra merger in the second quarter of 2026. Devon shareholders will retain roughly 54% of the combined entity, and the deal is projected to generate $1 billion in annual pre-tax synergies. The post-merger dividend is expected to jump 31% to $0.315 per share quarterly. Devon’s stand-alone 2025 free cash flow was $3.12 billion, a remarkable increase of 465% year-over-year, achieved at crude prices that, again, were considerably below the current level.

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Of course, should oil retreat below $90 a barrel, both stocks will suffer. But with Hormuz structurally restricting tanker flow, the Strategic Petroleum Reserve depleted, and both operators already generating record cash at lower prices, they enter the second half of 2026 with a distinct, if unappetizing, advantage. One suspects, however, that the market is pricing in not prudence, but panic. And in such circumstances, the contrarian investor, like a well-bred cynic, is often best positioned to observe the ensuing chaos with a detached, and perhaps slightly smug, amusement.

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2026-03-18 23:53