Exxon Mobil (NYSE:XOM) has started to find its footing. Yes, Exxon Mobil stock is still down 38% year-to-date, which is pretty atrocious. However, shares are up almost 50% off their 52-week lows. Despite only a modest recovery in oil prices, and continuing weakness in natural gas and the downstream businesses, investors are taking a second look at Exxon Mobil.
That’s warranted. The company is one of the all-time champions in terms of shareholder value creation. For decades, Exxon Mobil has been one of the ultimate widow-and-orphan stocks — you could count on it to deliver steady profits and rising dividends regardless of economic conditions. While this novel coronavirus provides unique challenges to Exxon Mobil, the company will survive this crisis and come out stronger.
That said, with the stock back up significantly since March, a lot of this rebound has been priced back in. If we’re being honest, current conditions for Exxon Mobil stock remain dreadful. The company is looking at a rare quarterly operating loss when it reports earnings Friday, and may even cut its dividend in coming days. Here’s what you need to know ahead of Exxon Mobil’s earnings report.
How Exxon Mobil Could Surprise
In June, I gave a detailed analysis of what is ailing Exxon Mobil stock in 2020. The core problem is that all of the company’s different business units are struggling at once. Historically, when energy prices fall, something else, like refining or chemicals does well. However, the coronavirus has managed to crush demand across the board, causing profits to fall in all of Exxon’s business units at the same time. That’s why we’re talking about the company losing money outright and potentially having to cut the dividend.
However, certain pockets of the economy are starting to show a rebound. And that includes some commodities, such as copper, that you’d normally expect to be in a deep funk right now. If Exxon pops on earnings, it’s likely to be because some part of the business such as chemicals or refined products is starting to show unexpected strength.
Analysts Expect a Poor Earnings Report
If you’re looking for a bullish outcome for Exxon Mobil stock out of this earnings report, that’s how you would get there. On the whole, though, consensus is negative coming into this report, and with good reason. Oil prices are still low (albeit improving), natural gas is in the dumps and refining and chemical margins are weak.
Politics are an increasing risk factor as well. Several midstream oil and gas transportation projects have run into legal problems in recent months, and other operators have cancelled planned investments given the rising risk. With Vice President Biden’s growing lead in the presidential polls, the energy industry is looking at 2021 and beyond with an increasingly wary eye.
Meanwhile, Exxon is likely to report a loss this quarter — an exceedingly rare event for the company. This will force the company to add to its mounting debtload. Against that backdrop, the company may decide that its current dividend yield of 8% is excessive. Until there is more clarity about when the company can generate robust profits again, the board of executives may feel a dividend cut is required.
Reuters added to the speculation on Thursday. They reported that Exxon is set to report a loss Friday, and will resort to large layoffs in order to preserve the dividend. Of course, nothing is official until the company reports. However, that article suggests that Exxon will remain in dividend limbo for another quarter while we wait to see if the company can turn things around.
The Verdict on Exxon Mobil Stock
I own Exxon Mobil stock and remain bullish on its long-term prospects. If you are focused on a multi-year time horizon, there’s nothing wrong with Exxon Mobil here.
That said, for traders, there’s little incentive to take on or add to positions right now. Exxon Mobil continues to be a 2021 story. We need to see a much more robust economic recovery before energy demand is really going to normalize. There are some encouraging signs, but also other more cautious notes. After an initial upswing, U.S. air traffic appears to be stalling out, for example, which is a significant problem as jet fuel is a major component of oil demand.
We’ll know a lot more as analysts update their models following this earnings report. Until then, however, patience is advised. There are plenty of things that Exxon could announce, such as a quarterly earnings loss and/or a dividend cut which would hurt sentiment. And with the stock up sharply from its 52-week lows, that sort of negative news would not be well-received.
If you really want to put money to work immediately in the energy sector, you might consider choosing an oil and gas company such as Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) that has already cut its dividend. In that case, the bad news is baked into the stock, whereas a dividend cut or other bad earnings news out of Exxon could trigger a short-term correction.
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 RDS.B and XOM stock.
