Exxon Mobil is a Classic Yield Trap That May Not Last Much Longer

If you got into Exxon Mobil (NYSE:XOM) on March 16, you are seeing a great bargain. That was when XOM stock dropped to its low of under $33 per share. It will open May at $46.47. It just announced the 87-cent per share dividend will remain (for now).

Exxon Mobil stock is a Classic Yield Trap That May Not Last Much Longer

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If you assume that dividend for a year, and divide it by the March 16 share price, you’re looking at a yield of 10%. Since March 16, the stock is also up 45%.

Mine may be a minority view, but once that dividend is paid, take the capital gain and get out.

No Future in Oil

Exxon Mobil is going through a relief rally. Investors are looking past the pandemic. They see oil prices rising as high-cost operations are squeezed out and life returns to normal.

All that may happen. But there is no long-term future in it.

Costs for renewable power, mainly solar and wind, fell below those of fossil fuels over the last few years. Today’s low oil prices change that equation but it’s temporary. The oil industry can’t survive on today’s prices.

Exxon Mobil says it can be profitable with world oil prices at about $40 a barrel. Production would mainly come from Texas’ Permian Basin and offshore Guyana. The world price, based on Brent North Sea oil, is currently below $27. Futures markets see the price for West Texas Intermediate, the primary U.S. grade, staying below $40 until the end of 2023.

By that time, BDO estimates renewables will have captured 33% of the electricity market. By that time, the auto industry will be making more than 5 million electric cars per year.

To attain a consistent price of $40 a barrel, oil companies need to produce less oil. But until recently Exxon Mobil was planning to double production in the Permian. By 2023 Guyana will be coming online. That oil will face competition from places like Sri Lanka , and Senegal , that never had production before.

The current supply-demand imbalance could easily become a “new normal,” with producers forced to ration supply. But there is no indication that big producers like Saudi Arabia and Russia are prepared to do that. Political instability may disrupt the supply chain as the impact of falling production becomes clear. But every such event only creates new opportunity for renewable power, especially the cheapest form of it, which is efficiency.

Exxon’s Big Mistakes

Expecting Exxon Mobil to manage its way through this period may also be a bad bet.

Exxon missed the shale boom, as a recent Bloomberg feature noted. It wasted billions on Canada’s “oil sands,” and took on enormous debt. It assumed a break-even price on those investments of $60 a barrel. The message of the market is that’s not going to happen.

As I wrote in early March, Exxon rival Chevron (NYSE:CVX) seemed to bite the bullet on all of this last year. It set a course toward self-liquidation, promising to deliver $75 billion to shareholders over five years. To do that, it would produce more than it would add to reserves.

But the novel coronavirus means even that may not be viable. All Exxon has promised to do, so far, is cut capital spending by 30%. 

Bottom Line on XOM Stock

Exxon Mobil believes there is still a long-term future in the oil business. Management’s asking XOM stock holders to have faith.

The markets are telling a different story. Exxon won’t bring production costs in line with market prices for years. Exxon Mobil has $50 billion in debt and its credit rating was cut last month. Refining operations aren’t likely to make up the difference.

At Exxon Mobil’s current price, that 87 cents per share paid in a dividend yields 7.33%. You can grab that payout by holding shares for just a few more weeks. Beyond that, however, and it’s a yield trap. You’re likely to lose more on the equity than you’ll get from the dividend.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story. 

Article printed from InvestorPlace Media, https://investorplace.com/2020/05/exxon-mobil-stock-is-a-classic-yield-trap/.

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