Investors Shouldn’t Touch Exxon Mobil With a 10-Foot Pole

Exxon Mobil (NYSE:XOM) lost 12.2% on Monday, the worst one-day performance for XOM stock since October 2008. While it’s tempting to wade back into the market after the Dow lost more than 2,000 points, I wouldn’t recommend it.

Exxon Stock Is Very Strongly Positioned for the Long-Term Investor

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However, if you do decide to nibble, I can think of a hundred different candidates not named Exxon Mobil. Here’s why.

XOM Stock Wasn’t a Great Buy Before Monday’s Crash

According to BNN Bloomberg, Monday’s correction pushed XOM to its lowest level since acquiring Mobil for $81 billion in 1999. The terms of the deal saw Exxon issue 1.32015 shares of its stock for every share of Mobil stock. In addition, it assumed $4 billion in Mobil debt.

Let’s say that you owned 100 Mobil shares before the 1999 takeover. Let’s also assume that you kept all 132 Exxon Mobil shares you received until today. Those shares are worth $5,751.24 ($43.57 a share as I write this). Adjusted for splits and dividends, that’s a cumulative return of 99.5% based on a November 30, 1999 (the date merger approved by Federal Trade Commission) share price of $21.82.

On an annualized basis, that’s a compound annual growth rate of 3.5%. Over the same period, the SPDR S&P 500 ETF (NYSE:SPY) would have delivered a compound annual growth rate (CAGR) of 5.6% (210 basis points higher than Exxon) based on the November 30, 1999, adjusted share price of $95.51 and a March 10, 2020, adjusted share price of $285.78.

We’ve become so accustomed to double-digit returns in recent years that the 5.6% annual return for SPY seems almost minuscule, but it’s quite good relative to XOM.

Fast forward to 2009.

On December 14 of that year, Exxon Mobil announced it would buy XTO Energy for $41 billion, including the assumption of $10 billion in debt. The transaction, like the Mobil deal, was paid for in stock. Shareholders received 0.7098 shares of XOM for every share held in XTO.

If XTO shareholders kept their XOM stock to today, they’d be sitting on a CAGR of -1.3%. By comparison, if they’d bought SPY with the proceeds, they’d have a CAGR of 12.1%, or more than 13 percentage points higher.

The opportunity cost of owning Exxon Mobil stock over the past decade has been tremendous. And it’s not going to get any better. If you are one of the poor souls who owned Mobil or XTO stock before Exxon’s acquisitions, and still do today, I would dump those shares faster than dropping a scalding hot pot of water without an oven mitt.

Way Too Much Debt

I believe I wrote about Exxon Mobil for InvestorPlace on three occasions in 2019.

In July, I wondered if investors should buy XOM stock on weakness. I concluded that its stock was a value play because of its $14 billion in free cash flow. However, I suggested investors wait until it dropped into the $60s before buying. At the time, it was hovering around $76. It didn’t drop to that price level until August, where it stayed until 2020.

“Owning XOM stock has been a mug’s game over the past decade. I don’t think it’s going to get much better over the next decade as the world continues to move away from oil,” I wrote on July 9. “That said, it’s got an excellent dividend yield a tad under 5%. If you need to park some money in an income-bearing investment, you could do worse than owning XOM.”

Today, that yield is 8.3% and rising.

The next time I wrote about Exxon was late August. By then, I’d turned bearish, arguing that the company had a debt problem made worse by its free cash flow turning negative. It finished fiscal 2019 with positive free cash flow of $5.4 billion, but it was well down from $16.4 billion in 2018.

Finally, in September, I questioned the company’s move to buy more assets in the Permian Basin because it already had 1.6 million acres there that are expected to generate more than a billion barrels of oil per day.

“It seems to me that generating 20% of the basin’s overall production, as Exxon Mobil does today, is enough. To pay anywhere from $8 billion to $84 billion more to add to its Permian production would be overkill since a recession would tremendously reduce the value of an acquisition,” I wrote September 27.

Now with the coronavirus sending us perilously close to a recession, it could be tempting for CEO Darren Woods to go hunting for a cheap acquisition. I concluded that XOM stock is not worth buying if you’re interested in income and capital appreciation.

Today, down 40% from September, I don’t believe the situation’s changed. If anything, the fight between Russia and Saudi Arabia has only made things worse. With almost $47 billion in long-term debt, I wouldn’t touch XOM stock with a 10-foot pole.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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