It was a dismal quarter for the stock market, with the S&P 500 slumping 20% even after a sizable recovery from the lows. Remarkably, things were even worse, much worse in fact, for energy stocks like Exxon Mobil (NYSE:XOM). XOM stock, incredibly, lost 44% of its value over the past three months.
Exxon Mobil wasn’t the only energy company to suffer. Far from it, in fact. The Energy Select Sector SPDR ETF (NYSEARCA:XLE) lost more than half its value since the start of the year. From its peak in 2014, the XLE ETF has lost more than 70% of its value.
Things get even more bleak if you zoom in on oil & gas producers specifically. The SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP) is down 65% year-to-date and has collapsed an incredible 90% since its peak in 2014. Remember, these are ETFs of a whole industry, not just one struggling company.
Is there any hope for energy stocks in general, and XOM stock in particular? As hard as it may be to believe at the moment, the answer is yes. It’s unlikely that the status quo will hold for oil and gas prices. When things start to turn, the strong companies will be positioned to take advantage, and Exxon Mobil will be leading the pack.
A Storied History
Exxon Mobil has been one of the the most resilient companies in the energy industry over the decades. Dating back to the Rockefeller days, Exxon has overcome all sorts of challenges, spanning depression, war, oil busts, and more. Impressively, XOM stock has grown its dividend every year dating back to the early 1980s.
It managed that feat despite a massive oil bust. From the end of the 1970s onward, the price of oil collapsed and wouldn’t meaningfully recover until the 2000s. Oil bottomed out in 1998, briefly falling below $10/barrel. Gas stations sold their products under $1/gallon across much of the Midwest and South in 1999. Despite it all, Exxon announced its usual dividend increases in the late 1990s like clockwork, despite the price of oil being through the floorboards.
They managed it because Exxon is a complete business, or as they say in the industry, it’s an integrated company. This means it owns the entire supply chain. Exxon finds and produces oil from its wells around the world. It owns pipelines and other midstream infrastructure to deliver its oil to refineries.
About those refineries; Exxon owns them too. Then it distributes gasoline and other refined products to, in many cases, Exxon-branded fueling stations. By controlling the whole supply, Exxon has survived many ups and downs in the oil and economic cycles, as profits tend to increase in one segment as it falls elsewhere.
In 2020, Diversification Isn’t Helping XOM Stock (Yet)
So far, however, this corona virus bust is acting differently from energy downturns. Nothing at all has been spared. That’s why there are legitimate concerns that Exxon may have to do the unthinkable and actually cut its dividend. At 8.9%, Exxon’s dividend yield is the highest it has been in decades, and investors are rightfully nervous about its safety.
Already, the company had been overspending its cash flow in recent years as it invests heavily in new growth projects in Guyana and elsewhere. These were expected to reap huge profits assuming an oil price of $4o or better, but will deliver little in the way of profits or cash flow at current bombed out prices.
Historically, in times of low oil prices, Exxon could always count on its refining, chemicals, distribution, and other associated businesses. Right now, however, with hardly anyone driving, using jet fuel, or consuming other oil-based products, profit margins have collapsed across the board. Major refiners such as Valero (NYSE:VLO), along with Exxon, are idling capacity as people simply aren’t buying much gasoline right now. Not only is Exxon getting hammered on its oil production, its associated businesses are also earning meager profits for the time being.
The Status Quo Won’t Hold: Prices Will Improve
The thing with the current oil market situation is that no one is making money. You might think the lowest-cost producers in North America could still make money, for example. Canadian Natural Resources (NYSE:CNQ) has ongoing production costs of slightly less than $10 per barrel. Unfortunately for them, the benchmark West Canada Select oil price has crashed to just $5 per barrel this week (it was at $38 in January, by contrast). Needless to say, even Canadian Natural’s super low-cost oil sands are money losers selling at just $5/barrel. For another example, the Mexican oil blend is at $11, which is surely sticking state giant Pemex with huge losses there.
The list goes on. Saudi Arabia relies on oil money to fund their political system. They might be able to generate a small operating profit at current prices, but they certainly can’t cover the nation’s bloated governmental expenses. Russia has little to gain from these oil prices staying down here for long either.
As the adage goes, in commodities, the cure for low prices is low prices. When virtually all operators in a market are losing money, they will shut down supply quickly. And a lot of that supply, once it is taken offline, won’t come back anytime soon.
Shale, for example, isn’t economic below $50/barrel or so in many cases, and depletes quickly once a well is up and running. Needless to say, new shale drilling will slow to a trickle with prices down here. Meanwhile, once quarantine orders start to lift, oil demand will surge again while supply remains at a new lower level. In due time, oil prices will move back up.
XOM Stock Verdict
Exxon, for what it’s worth, appears to be around breakeven on its oil production in the low-to-mid $30s per barrel. The other businesses such as chemicals and refining should continue to generate profits once the economic shutdown ends. Thus, a return to $40 oil, say, would be enough to put Exxon in decent shape, though hardly windfall profits. But unless oil stays down at $20 or less for years, Exxon will get through this.
Maybe they end up cutting the dividend if the global economy remains deeply troubled. However, unlike other oil giants such as Occidental (NYSE:OXY), Exxon retains a fantastic balance sheet and credit rating. Like in the late 1990s, it can endure a few lean years before things turn around. I know the situation looks particularly bleak with refining and chemicals struggling too, but that should pass once the virus starts to recede. Now isn’t the time to lose confidence in Exxon Mobil stock.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he owned Exxon Mobil stock and CNQ stock.