When investing in a market sector, it pays to bet on the biggest and the best. Energy stocks are likely facing an uphill battle, but at least Exxon Mobil (NYSE:XOM) has a size advantage and plenty of capital. Thus, Exxon Mobil stockholders should be better positioned for whatever difficulties may lie ahead.
The impact of the novel coronavirus has made it virtually impossible to predict the future course of any sector. The energy market is particularly challenging because it’s vulnerable to demand deficits and storage issues.
Even an industry giant like Exxon Mobil must therefore take proactive measures to ensure its long-term viability. What, then, is the company doing to hedge against the pandemic’s fiscal impact? The owners of Exxon Mobil stock need to see a swift and sufficient response from the company.
A Closer Look at Exxon Mobil Stock
Investing in Exxon Mobil is almost like buying stock and a commodity at the same time. Its share price is affected by the price of oil, but it also moves somewhat in tandem with the broader stock market.
It’s interesting to observe that Exxon Mobil’s shares started their decline prior to the coronavirus crisis in the U.S. As early as the middle of January, the stock was beginning to drift downward from the $70 area in which it had traded for quite some time.
After bottoming out in the low $30s in March, Exxon Mobil stock’s ascent has been shaky at best. The bulls can’t afford to lose control of the price action again. A strong push above $50 on heavy volume would provide some much-needed hope.
Misplaced Confidence?
Part of a CEO’s job is to foster investors’ confidence. The oil market is so rocky now, though, that even Exxon Mobil CEO Darren Woods couldn’t deny the obvious.
“COVID-19 has significantly impacted near-term demand, resulting in oversupplied markets and unprecedented pressure on commodity prices and margins,” was Woods’s dire but honest summary of the situation.
Nevertheless, the CEO followed this up with a hopeful tone, predicting, “Economic activity will return, and populations and standards of living will increase, which will in turn drive demand for our products and a recovery of the industry.”
That will happen eventually. For the time being, though, energy producers must contend with a number of headwinds:
- Natural-gas prices near 25-year lows
- The attorney general of Washington, D.C. filing lawsuits against large oil companies, including Exxon Mobil
- A federal judge ordering the shutdown of the North American Line 5 pipeline
- Texas Governor Greg Abbott ordering the state’s bars to close down
- A rule in California requiring that more than half of the trucks sold in the state must have zero emissions by the year 2035
Making a Case for Exxon Mobil
Clearly, any energy-market wager will carry risks in the near-term. As a long-term investment, though, Exxon Mobil is as valid as any other in the sector.
Exxon Mobil’s market capitalization of $184.5 billion reminds us of just how “too big to fail” it really is. Moreover, its trailing price-earnings ratio of 16.37 suggests that the shares offer a compelling value proposition.
And while investors are waiting for the energy sector to work out its problems, they can collect Exxon’s generous forward dividend yield of 7.70%. Plus, it’s reassuring to know that Exxon Mobil is being proactive in the area of capital preservation.
Specifically, the company plans to cut its capital spending in 2020 by roughly 30%. Unfortunately, the plan will include a number of job cuts. Still, Exxon Mobil’s shareholders can hope that its cost-cutting measures will strengthen the company’s balance sheet while protecting its competitive dividend yield.
The Bottom Line
The confidence of Exxon Mobil’s CEO in Big Oil’s resilience provides little if any comfort amid a slew of problematic factors. Consequently, only investors with a lengthy time horizon and an exceedingly optimistic outlook on the energy market should consider buying Exxon Mobil stock now.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
