Scanning through financial social-media forums at the end of 2020’s first week, one could sense the disappointment among Exxon (NYSE:XOM) stockholders. Indeed, the shareholders collectively expressed a deep sense of disappointment that their Exxon stock wasn’t in the green.
It’s an object lesson in speculation versus investing: the gambler’s logic would dictate that geopolitical shocks ought to benefit the Exxon stock price, but reality had a different outcome in store.
Long-term investors, in contrast, are focused on Exxon’s value proposition, which remains solid irrespective of day-to-day media headlines.
Exxon Isn’t an Oil-Price Substitute
Your parents and grandparents might have held Exxon stock for decades as a dividend-yielding safety play, and I fully respect that strategy. Don’t be lulled into complacency, however, as XOM stock is prone to unexpected price moves as the energy sector is as event-driven as they come.
That being said, even the most shocking geopolitical events aren’t likely to move the Exxon stock price as much as a small- or mid-cap company. Therefore, whenever XOM stock is depressed in price, I feel it’s worth picking up some shares as a conservative value play. In fact, I see the current share price as fairly attractive since it’s down from $83 in April and almost $90 a couple of years ago.
To me, that’s a solid justification for owning Exxon stock as opposed to using XOM shares as a proxy for the oil price, which is not a reliable strategy. The price action on Jan. 3 demonstrated that in stark fashion, with February WTI crude oil futures spiking 3.1% to $63.05 per barrel while the XOM stock price slid -0.8% to end the week at $70.33.
The catalyst, just to provide a quick summary, was an airstrike launched by American military forces. This airstrike killed Qasem Soleimani, Iran’s top general and a suspected terrorist-network builder; many political pundits were surprised as President Trump seemed unwilling to pursue military action against Iran throughout the final months of 2019.
Exxon Is a Company, Not a Commodity
Browsing through online message boards, I got a sense that XOM stock bulls were more alarmed by the lackluster price action than the airstrike itself. What they need to understand is that XOM isn’t synonymous with the spot-oil price; if that’s what they’re seeking, they might consider trading oil futures instead of Exxon stock.
In company-specific news, Exxon happened to provide fourth-quarter guidance on the trading day following the airstrike. In the guidance, the company indicated that operating results for the fourth quarter will decline compared to the same-quarter results from a year prior. As reported by Refinitiv IBES, a number of analysts cut their earnings forecasts for Exxon following the company’s guidance, with the average per-share earnings estimate falling from $0.71 to $0.50.
Personally, I tend to view this as an overreaction. Analysts and investors shouldn’t ignore the concurrent announcement that Exxon will gain up to $3.6 billion as it sells off the company’s Norwegian oil and gas production assets; the overarching plan is to sell off $15 billion worth of Exxon’s assets by the year 2021.
I’m encouraged by Exxon’s cost-cutting measures and not deterred by the company’s muted expectations; if analysts and shareholders want to downgrade the stock and lower its price, that only makes XOM shares more attractive to me. As far as the oil price is concerned, it will go up and down but Exxon has survived oil’s vicissitudes and will continue to do so.
The Takeaway on Exxon Stock
The oil price is undoubtedly a contributing factor in determining the XOM stock price, though recent events demonstrate that it’s not the only factor. Informed investors should look beyond Big Oil and big turmoil: as a company of size and renown, Exxon remains durable and the shares remain buyable.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.