Normally, I would gladly recommend Exxon Mobil (NYSE:XOM) stock at $38, especially when the dividend is over 9%. But of course, we are not in normal times. And it is unclear when things will get better with the novel coronavirus pandemic. But this is not the only problem. Exxon Mobil stock will likely be weighed down even after the virus is conquered.
That is, with Saudi Arabia’s relentless policy of driving down the price of oil, the energy markets will take considerable time to get back on track. The country’s plan is to produce 12.3 million barrels a day for April, up from 9.7 million in February.
And as supply soars, there will be a precipitous drop in global spending. According to analysts at Bank of America, the demand will drop by a grueling 12 million barrels per day. This would be a record, actually.
Just yesterday, the price of U.S. West Texas Intermediate crude sunk by 6.6% to $20.09. It’s at the lowest point since early 2002. Just this month, the price of crude is off by more than 50%.
So how far may it drop? It’s far from clear. But many analysts continue to be quite bearish. For example, Raymond James’ John Freeman is forecasting $10 a barrel.
In mid-march, Exxon CEO Darren Woods announced the following: “Based on this unprecedented environment, we are evaluating all appropriate steps to significantly reduce capital and operating expenses in the near term … We will outline plans when they are finalized.”
He did not provide any specific details. But then again, there is lots of room to cut back on the capital spending. Note the original plan was for $30 to $35 billion from 2020 to 2025. As for operating expenses, there will likely be shutdowns of various operations as well as layoffs.
Granted, the company does have the benefit of a diversified platform, which includes refineries, retail operations and chemicals. But even these businesses are likely to quickly decelerate as economic activity stalls.
So what about Exxon’s liquidity?
For the most part, I think the company should be OK. Even though S&P Global cut the rating on the company’s bonds, the credit rating is still a standout AA. In other words, there should be deep lending capacity.
Yet I think the dividend could be in jeopardy. It’s really difficult to justify shelling out $15 billion to shareholders every year. After all, other companies in the oil industry have already either eliminated or cut back their dividends, such as Occidental Petroleum (NYSE:OXY).
Bottom Line on Exxon Mobil Stock
One encouraging sign is that there has been increased insider buying for Exxon Mobil stock. One purchase came from senior vice president and principal financial officer Andrew Swiger, who paid $1 million for 30,000 shares (his total is now 1.2 million). Then there is Neil Duffin, who is Exxon’s president of the Global Projects company. He bought $1.1 million of Exxon Mobil shares (he owns a total of 571,150).
While insider buying is certainly a positive sign, it is far from fool-proof. It also tends to be early. The main reason is that insiders need to hold onto their shares for six months before realizing gains.
Thus, in the near-term, it’s probably best to wait on Exxon Mobile stock. There is just too much uncertainty right now.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.