These are trying times for the energy sector, and not just because the group is scuffling, as evidenced by a year-to-date gain of just 2.79% for the Energy Select Sector SPDR Fund (NYSEARCA:XLE). That compares with an almost 27.6% gain for the S&P 500.
Integrated oil companies, such as Dow component Exxon Mobil (NYSE:XOM), are in a tricky spot in 2019. Not only is there political momentum for adoption of alternative energy sources, but green energy is becoming cheaper to deploy and produce. Many of the related investments are surging.
Related to the aforementioned struggles of the energy sector are some telling anecdotes about the waning importance of the group in the major U.S. equity benchmarks. They go beyond Exxon stock being up just 0.21% year-to-date, making it an obvious laggard in the Dow Jones Industrial Average. Earlier this year, Exxon Stock fell out of the top of the S&P 500 for the first time on record. It has returned to that group and the SPDR S&P 500 ETF (NYSEARCA:SPY) currently devotes just 4.35% of its weight to energy, making it the S&P 500’s eighth-largest sector weight.
Back in the early 1980s, energy commanded close to 30% of the benchmark domestic energy gauge. The sector’s current faltering comes as the U.S. has ascended to the top of the global oil production rankings.
Causes for Concern With XOM Stock
This year’s weak oil and gas prices are crimping not only Exxon stock, but the company’s ability to generate cash flow.
“Cash flow excluding working capital and asset sales proceeds of $8.1 billion failed to cover capital spending and dividends,” said Morningstar in a recent note. “Year to date, operating cash flow, excluding asset sales proceeds and working capital, of $20.8 is running at about two thirds of management’s target introduced March.”
One of the dividend exchange traded funds that holds XOM stock is the ProShares S&P 500 Dividend Aristocrats ETF (CBOE:NOBL), which follows the S&P 500 Dividend Aristocrats Index, meaning Exxon has a dividend increase streak and that the company would be loathe to cut the payout.
Anything is possible, but Exxon’s dividend looks safe for the time being, particularly because the company has been prudent with its spending plans and is planning $15 billion in divestments through the end of 2021.
“ExxonMobil is breaking with the integrated pack that have committed to restraining capital spending and increasing cash returns to shareholders,” said Morningstar. “Instead, Exxon is planning to ramp up capital spending with the goal of doubling earnings and cash flow from 2017 levels by 2025 and delivering a return on capital employed of 15%, compared with 9% in 2018.”
Still, investors need to realize this isn’t their grandfather’s energy industry. There are seismic shifts at play, including the expectation that global oil demand will plateau in the early 2030s, which will affect energy equities, including Exxon stock.
“Wind and solar accounted for more than half of new power generation capacity additions in recent years,” according to a recent McKinsey study. “Renewables will continue to penetrate the global energy mix with solar and wind generation expected to increase by a factor of 60 and 13, respectively, from 2015 to 2050.”
Then there’s the impact of electric vehicles. No, not everyone will be able to afford a Tesla (NASDAQ:TSLA), but data confirm that electric vehicle adoption is surging. McKinsey says there will be over 100 million electric vehicles on the road by 2035, meaning reduced demand for oil in road-based transportation.
Bottom Line on Exxon Stock
Exxon stock isn’t expensive at 17.85x forward earnings, and with it yielding just over 5%, it’s easy to understand why some investors may want to nibble at the the oil producer’s shares. Additionally, it must be acknowledged that Texas-based Exxon is one of the higher quality names in its respective sector and that it can break even on crude production down to $40 per barrel.
On the other hand, assumptions that Brent crude prices will average $60 a barrel over the next couple of years could prove somewhat rich given increasing non-OPEC supply, namely from the U.S. and Russia.
Overall, what investors may end banking on with Exxon stock is sound management, capital discipline and strong long-term from Asia.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.