The performance of Exxon Mobil Corporation (NYSE:XOM) stock over the past decade appears rather unimpressive. Over the past ten years, including dividends, XOM stock has returned 49% — total. That’s an average return of just 4% per year, well below the S&P 500. Over the past five years, the news is even worse. Exxon Mobil stock has declined over that period. Including dividends, XOM has averaged just a 1.8% return since 2012.
Of course, one could easily argue that positive five- and 10-year returns for XOM stock in fact are quite impressive. WTI (West Texas Intermediate) oil prices peaked at $99 in 2007. They averaged $94 in 2012. WTI now trades at half those 2007 levels.
A number of oil companies have gone bankrupt; many other oil stocks trade at a fraction of their former value. In that context, the fact that Exxon Mobil stock has returned anything at all appears to reflect excellent performance. After all, most O&G stocks have done worse – and many much, much, worse.
But the performance of XOM stock over the past 10 years highlights a key problem for the stock going forward. Exxon Mobil stock performed better than most, admittedly, in a period of falling oil prices. But it didn’t perform well. And no matter where oil goes from here, there are many better choices than XOM.
Lower Oil Prices and XOM Stock
It’s true that Exxon Mobil stock has been one of the better performers in the O&G space over the past decade despite the major fall in oil prices.
That outperformance has come largely due to Exxon Mobil’s diversification, notably its downstream business. Refining profits tend to rise as oil prices decline — providing a natural hedge within the business.
It’s the downstream business that has allowed XOM stock to weather the storm. But the problem is that the downstream business’s benefit from lower oil prices isn’t enough to drive real upside if upstream (ie, exploration & production) businesses are struggling with $40 or even $30 oil.
Exxon Mobil might do better than, say, Anadarko Petroleum Corporation (NYSE:APC) in that scenario. But it’s highly unlikely XOM stock would see significant upside.
Meanwhile, there are plenty of major companies with direct benefits from lower oil prices. Most consumer-facing companies should see higher customer spending, with less dollars diverted at the pump. Delta Air Lines, Inc. (NYSE:DAL) and Southwest Airlines Co (NYSE:LUV), even given their hedges against oil prices, would benefit substantially (and already have done so). If oil prices decline again, XOM stock may stay roughly even. But investors anticipating that scenario should look elsewhere.
Higher Oil Prices and Exxon Mobil Stock
The problem for XOM is that even with higher oil prices, there are many better options. Explorers like Anadarko or low-cost producer Concho Resources Inc (NYSE:CXO) would see profits rise off $50-plus oil. Service plays such as beaten-down proppant manufacturer Fairmount Santrol Holdings Inc (NYSE:FMSA) would benefit immediately from improved sentiment, and in the mid-term from likely increased drilling.
It’s an odd case to make that Exxon Mobil stock isn’t a good play on higher oil prices. But it’s the truth. The same downstream business that provided a hedge as oil prices fell would provide a drag should they rebound. XOM stock certainly would benefit under $60-plus oil; but it likely would underperform most oil and gas stocks.
Other Majors Look Interesting
Even for investors looking to split the difference and buy an integrated major, it’s not clear that XOM is the best choice. Looking for a strong dividend? Chevron Corporation (NYSE:CVX) yields 4% to XOM’s 3.7%. And CVX has strongly outperformed XOM over the past five and ten years. Meanwhile, BP Plc (ADR) (NYSE:BP) offers a turnaround play in the space: higher risk, higher reward.
All told, it’s tough to build a compelling case for Exxon Mobil stock. The one case might be that Exxon is the best of all worlds — even if it’s unlikely to be the best in any particular world. It has enough diversified exposure to manage through pretty much any scenario. If oil does spike, XOM stock should rise. If it craters again, XOM stock should hang on.
That’s hardly a hugely attractive case, however, and there are many other large-caps outside the oil sector with similar arguments — and probably less risk. Exxon Mobil stock may do fine no matter what the oil price environment. But, as an investor, I usually look for a bit more.
As of this writing, Vince Martin had no position in any of the securities mentioned.
