From one standpoint, Exxon Mobil (NYSE:XOM) stock looks like a steal. Exxon Mobil stock is cheap and offers an attractive payout. The Dividend Aristocrat has a yield right at 5% at the moment — at a time when 10-year government bonds are offering 2%.
Given the internal hedge between the company’s upstream and downstream operations and its history of dividend increases, that yield alone seems to underpin an attractive bull case for XOM stock around $70. I made that case this summer, arguing that $70 would serve as a floor for Exxon stock.
That hasn’t quite played out — and perhaps that’s not surprising, either. After all, environmental concerns are pushing companies, consumers, and governments to look for new energy sources. The rise of Tesla (NASDAQ:TSLA), whatever its perceived flaws, has sparked significant competition and innovation in electric vehicles.
Oil prices haven’t recovered much from the 2014 crash. Given the explosion in shale supply and potential demand worries, there’s an obvious concern they won’t ever do so.
From that perspective, the backward-looking case for XOM stock — 37 years of dividend increases, steady earnings growth over time — is more like a trap. And buying a stock in a pressured industry is a good way to get into trouble, as shareholders in other U.S. giants like General Electric (NYSE:GE), Kraft Heinz (NASDAQ:KHC), and Anheuser-Busch InBev (NYSE:BUD) well know.
For now, $68 still looks attractive, though a recent pattern of lower highs and lower lows is concerning. But the risks going forward are real, as even Exxon Mobil management might agree.
Where’s the Big Exxon Mobil Acquisition?
Back in May, Occidental Petroleum (NYSE:OXY) prevailed over Chevron (NYSE:CVX) in a bidding war for Anadarko Petroleum. (Oxy’s win came with some help from Warren Buffett and Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B).)
The thought at the time was that the battle would lead to further consolidation in U.S. shale. The likes of Exxon and Chevron had plenty of firepower to make a deal, particularly with the ability to borrow at historically low interest rates. (Exxon has bonds that mature as far out as 2024 and still yield less than 2%.) Valuations among U.S. independent producers were low, making such deals accretive to earnings.
It simply hasn’t happened. Deals actually have been few and far between. An all-stock merger between Carrizo Oil & Gas (NASDAQ:CRZO) and Callon Petroleum (NYSE:CPE) is probably the biggest — and has been publicly opposed by CPE shareholders.
The intriguing question is: why? The case for heavy M&A seemed almost self-evident this spring. Oil prices admittedly have come down — they’re threatening a 52-week low — but so have valuations and interest rates. Exxon and other majors can fund shale deals at interest rates well under 3%.
They haven’t chosen to do so. And the obvious worry is that if the heads of the majors don’t see value in U.S. shale — or in oil exploration more broadly — then perhaps investors shouldn’t, either.
The Case for XOM Stock
The lack of a deal by Exxon Mobil seems particularly surprising given its plans for growth. CEO Darren Woods last year laid out a plan to double earnings by 2025. Even a smaller deal or two would seem to help toward that goal. With earnings set to plunge year-over-year in Q3, according to the company’s initial guidance, inorganic growth could offset oil price pressure.
It’s possible Exxon Mobil sees its existing upstream oil and gas efforts as enough. Plunging natural gas prices may limit the appeal of some shale plays. Management could be waiting on the 2020 U.S. presidential election, with a progressive candidate liable to increase regulations on domestic exploration.
There are possible reasons why Exxon hasn’t made its move yet. The lack of an acquisition doesn’t mean that Exxon management secretly believes Exxon earnings — and Exxon stock — are doomed.
But the apparent disinterest in M&A is a surprise, given the number of potential U.S. independent targets, low borrowing costs, and valuations across the industry. If Exxon Mobil doesn’t see value in U.S. producers, the fundamental case, dividend aside, becomes tougher to make. The strong dollar is pressuring overseas profits. Exploration in countries like Mozambique is always fraught with risk.
In this environment, I still believe XOM stock is going to get bought at a 5%+ yield. But, even if the comparison isn’t apples-to-apples, a similar argument could have been made about Altria (NYSE:MO). Altria’s debt has led to concern about a dividend cut, a concern that almost certainly doesn’t apply to Exxon stock at the moment. Still, that stock yielded over 8% before a recent rally.
Exxon stock isn’t likely to get to that level. But it’s also not going to show upside without more confidence toward the future of U.S. oil and gas. And it’s fair to ask: if management doesn’t have that confidence, should investors?
As of this writing, Vince Martin has no positions in any securities mentioned.