The novel coronavirus pandemic handed investors the opportunity to snap up stock in many iconic American companies at a ridiculous discount. Exxon Mobil (NYSE:XOM) is one of the world’s largest publicly traded international oil and gas companies. Exxon Mobil stock is currently trading at a discount.
The company has roots stretching back to 1870, with John D. Rockefeller’s Standard Oil. And XOM is currently trading at a 37% discount compared to its price at the start of the year. But you should still steer clear. Here’s why.
Oil Price War Followed by a Pandemic-Ravished Economy
Most companies have seen their stock drop steeply in 2020 due to the coronavirus pandemic. Oil producers have faced a double whammy.
Going into 2020, global demand for oil was still on the rise, but the rate of growth had been on the decline since 2017. In March — just as coronavirus panic was slamming stock markets — Saudi Arabia and Russia failed to come to terms on a production agreement that had helped to keep oil supply in check. By April, both parties were boosting production.
With demand for gasoline and jet fuel falling dramatically because of lockdowns, there was a near instant glut of oil. Prices dropped to levels not seen in years.
By the end of April, there were several dozen full oil tankers anchored off the coast of California. Around the globe, full oil tankers have become floating storage for the oil that no one wants — even at prices about one third of what they were at the start of the year.
That situation has devastated U.S. shale oil producers. It’s not good news for oil giants like Exxon Mobil stock, either. Its stock dropped from $70.90 to start 2020, to $31.45 by March 23. That’s a near 56% loss. Since bottoming out, XOM has bounced back slightly, but the future is a huge question mark.
Many tech companies like Facebook (NASDAQ:FB) are offering employees the ability to work from home on a permanent basis. Their cars will remain parked in their driveways. International air travel may never recover. With massive unemployment and a recession, spending is being slashed.
Even if oil prices recover to pre-pandemic levels (and that’s by no means a given), demand is likely to be down. Way down. That does not bode well for oil companies, even giants like Exxon Mobil.
Downgraded Credit Rating a Warning Sign
On March 16, S&P downgraded Exxon Mobil’s credit to AA. That’s still a credit rating that many companies would kill for, but a downgrade is always cause for concern.
And this one came with a warning:
Our negative outlook reflects the potential for a further downgrade if the company does not take adequate steps to improve cash flows and leverage over the next 12 to 24 months.
Exxon Mobil has been piling on debt — $50 billion at the end of 2019, compared to $35 billion at the end of 2018. That’s put it in an even more precarious position now that oil prices have have plunged with demand flatlined.
Has Exxon Mobil Stock Had Any Wins Lately?
It can’t be all bad news for Exxon Mobil. Are there any positives in there?
The company did admittedly notch a big win last year. The New York attorney general’s office launched a lawsuit alleging Exxon intentionally misled investors about the true cost of climate change. Losing the case would have been a disaster. The damages to be levied should Exxon lose was $1.6 billion. Worse, the precedent of a ruling against Exxon would have opened the company to additional lawsuits.
In December 2019, the case went to trial and was dismissed. After the verdict, Columbia University Law Professor John Coffee commented that the possibility of Exxon having to fight a similar case at the federal level was “very unlikely.”
So there’s a win for Exxon, but the celebration for investors was short-lived. Just weeks later, XOM stock started to plummet.
Bottom Line on Exxon Mobil Stock
When shares in a long established company are at prices not seen for over 15 years — and that’s the result of it falling off a cliff over a matter of weeks — but more investment analysts are recommending selling than buying? That’s a warning sign.
XOM may be at bargain prices. It may have bounced back a bit from the lows it hit in mid-March. Exxon may have escaped the New York lawsuit alleging climate change shenanigans against investors. The company may be far from the financial wreck that shale oil frackers like Chesapeake Energy (NYSE:CHK) have become.
But that doesn’t mean Exxon belongs in your portfolio. There are simply far too many negatives facing the company at this point. Even the very modest recovery of XOM has been turbulent, marked by three separate occasions where the stock dropped 9% or more in just a few sessions. The stock’s rich dividend (which has increased in 10 out of the past 12 years) is in jeopardy as well.
The dozens of full oil tankers anchored off the California coast aren’t going anywhere any time soon, and neither is this stock.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
