Shares of Exxon Mobil (NYSE:XOM) stock have seen better days. And with their next earnings call approaching on November 1, a recent SEC 8-K filing is spooking investors even more. Exxon management anticipates third-quarter revenue to be down by half on a year-over-year basis.
Not surprisingly, XOM stock is baking in this result and the stock is now down for the year. But this may be a case of emotions getting the better of investors. The recent attack on Saudi Arabian oil facilities bolsters this thesis.
However, energy stocks will always be affected by the headlines. That’s why investors in this segment have to look at what’s really happening. In the case of Exxon, the company is positioning itself for a range of outcomes. And these big plans may give Exxon Mobil stock a big upside.
Lower Oil Prices Have Been Hurting XOM Stock
For the past several years, investors and analysts have punished Exxon stock because of declining production numbers. But in the company’s most recent earnings call, senior vice president Neil Chapman asserted that some of this decline was due to capital allocation and not operational deficiencies. Chapman stated:
As I’ve commented previously, all volumes are not equal. There is a range of profitability on the volumes we produce. Our focus is on value, so we will continue to upgrade our mix and strengthen our portfolio. In other words, there’s no structural change in the upstream business from the perspective that I provided to all of you in March.
Translation: management wasn’t getting the desired return from some of the company’s drilling operations. So instead of continuing to produce for the sake of producing, it wound some of those operations down. Then, the oil firm spent the money in more lucrative opportunities.
Preparing for a Range of Outcomes
As part of his presentation at the Softec Barclays Energy Conference, Exxon Mobil CEO Darren Woods outlined how the company was preparing for a range of outcomes. In his remarks, Woods pointed out the dichotomy that exists in the energy industry.
On the one hand, there is a demand for lower carbon emissions. On the other hand, the International Energy Agency projects that global demand for energy will increase by 20%. Not surprisingly, India and China will make up the bulk of that demand.
That is the challenge that Exxon Mobil and its competitors in the sector face. How do you balance demand for oil that is not going away soon with an increasing demand for alternative energy sources that require investment to become viable replacements?
In Exxon’s case, it recently committed to spend up to $35 billion a year through 2025 on capital projects. These would be in the upstream, midstream, and downstream segments of its business.
And a big reason Exxon can make this commitment is because it is building its business to be robust amid the ups and downs of the oil industry. It starts with a solid balance sheet that has a debt-to-equity ratio of just 0.24. And income investors will appreciate the company’s conservative approach that makes it a dividend aristocrat – with 37 years of delivering annual dividend increases.
How Will Exxon Mobil Pay for this Investment?
To reach its goal of $35 billion a year, the company can’t rely solely on revenue in a sector that is still subject to rising and falling oil prices. That’s why the announced plans for divesting assets is so compelling. The money the company generates from the sale will go to fund its capital spending. It still means there’s more work to be done, but it’s a good start.
As InvestorPlace contributor Chris Lau wrote recently, Exxon will only move forward on projects that will deliver strong returns even if oil prices were to dip below $35 a barrel. So, by making investments in these other areas, XOM is giving investors diversity that, as Lau states, may make them better off than if they were to put money into an energy-based exchange-traded funds
Bottom Line on Exxon Stock
There is a saying that life is what happens while you’re busy making other plans. I think that saying is applicable with some stocks. The real story of what’s happening gets lost by investors who are looking at what’s happening right now.
And that, in a nutshell, is why I believe there’s a strong case for investing in XOM stock as a long-term opportunity. The energy industry is evolving. The smart money moving forward will be looking to companies that are preparing for this change.
And then consider that Exxon has a solid balance sheet to match its commitment to invest in high-growth potential businesses. With this combo, I think there is a compelling case for Exxon stock.
As of this writing, Chris Markoch did not have a position in any of the aforementioned securities.