Exxon Mobil Stock Is Worth Holding Despite Soft Earnings

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It’s been a mixed month for the energy sector. The price of oil briefly went under $0 per barrel in recent weeks. While oil has recovered a bit, it still remains at historically low levels. Natural gas has advanced a little, but is similarly far below where it traded in past years. Energy stocks, as a group, have rallied more sharply. Many of the bigger integrated oil companies have recovered roughly 50% off the lows. Exxon Mobil (NYSE:XOM) stock, for example, has recovered from a recent low of $30 to $45 now.

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While that bounce is impressive, it still pales in comparison to Exxon’s 52-week high, which is way up at $78 per share. In the short-run, Exxon Mobil stock will face more challenges ahead. Its recent earnings report was pretty lousy.

More broadly, the coronavirus has crushed the company’s prospects over the next year, and it has done so in non-obvious ways that go far beyond just the headline drop in the price of crude oil.

That said, there’s still reason for optimism. The company, drawing on its best-in-industry balance sheet, managed to maintain its dividend against predictions that it would be forced to trim its payout this quarter. Exxon Mobil is going through a brutal period, but as long as you have confidence in energy long-term, the company is worth holding onto.

A Rare Quarterly Loss for Exxon Mobil Stock

Last week, Exxon Mobil announced that it had lost money in the first quarter of 2020. While the company’s revenues topped expectations, on earnings, it reported a loss of 14 cents per share. This was Exxon Mobil’s first quarterly loss in more than 30 years. Even in the 2008 Financial Crisis, when oil dropped from $140/barrel to $30/barrel, Exxon continued to eek out a modest profit.

This time around, however, the weight of the difficult energy markets managed to drag the company into loss-making territory. The company hasn’t lost its cool, though. Unlike major peers such as Occidental (NYSE:OXY) and Royal Dutch Shell (NYSE:RDS.B), Exxon Mobil chose not to cut its vaunted dividend.

The company still has a great balance sheet, and can take a longer-view to this economic cycle. Even so, investors are justifiably nervous.

Various Units Are Struggling

The pressing issue for Exxon Mobil now is that the coronavirus has crushed all segments of Exxon Mobil’s business simultaneously. Remember that Exxon Mobil is an integrated oil company. This means that it controls the whole supply chain, from oil well to gas station.

Exxon Mobil finds, develops, and extracts oil. It pipes, ships, or otherwise transports it to refineries. At those Exxon Mobil refineries, it turns its oil into gasoline, jet fuel, asphalt, and feedstock for chemicals, among other uses. It then delivers the gasoline to its branded gas stations. It has a chemicals business to turn much of the remaining refined oil into products for industrial use.

Usually, when one part of the business is doing poorly, others offset it. For example, chemicals often run inverse to oil; at high oil prices, chemicals make less profit and vice versa. Normally, chemicals would be doing well now with dirt cheap oil. Instead, thanks to the coronavirus, much industrial activity is shuttered so demand is way down.

Similarly, refining profit spreads have plummeted — in some places even running below zero at times — because there simply aren’t many people commuting, taking commercial flights, or otherwise using refined petroleum products at the moment.

With oil production, refining, and chemicals all struggling thanks to the virus, Exxon Mobil faces a perfect storm. Within a few months, profits for some things, like refining, should start to come back as the most extreme lockdown measures end. Still, it’s going to be a much longer recovery time for Exxon Mobil than it would be during a usual down cycle in energy.

Exxon Mobil Stock Verdict

CEO Darren Woods recently reminded shareholders of the company’s long-term vision. On the quarterly conference call last week, Woods said that:

Even with the current downturn, projections show energy consumption growing by 20% through 2040. Most of the growth will be in developing nations and more than half of that energy demand will be met by oil and natural gas […] Our strategy in business is based on long time horizons which is why we always go back to the fundamentals. At the same time, we have to address short-term challenges such as the unprecedented market conditions we face today while not losing sight of long-term value.

That really sums up the investment question around Exxon Mobil right now. If investors are patient and have confidence in the long-term vision for energy, Exxon Mobil remains a solid option.

The company has been in business and has rode out numerous busts in its more than a hundred years of operation. And, as Woods noted, however dire things get now, the world will need more energy in coming years. For all the green rhetoric, renewables aren’t quite ready to shoulder the full load just yet.

Additionally, despite the traumatic conditions, Exxon Mobil has continued to maintain its dividend. The company is treating shareholders well. Woods is showing a consistent focus on maximizing long-term value rather than making panicky short-term decisions.

All that said, it’s going to be a rough six months or year for Exxon Mobil. If you buy XOM stock today, prepare to hold on for awhile, as it’s going to be a bumpy ride before prosperity returns.

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 Royal Dutch Shell 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.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/exxon-mobil-stock-is-worth-holding-despite-soft-earnings/.

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