If you’re looking strictly at big picture data, it’s hard to get excited about oil companies. That sentiment is multiplied exponentially for speculative oil firms like Mexco Energy (AMEX:MXC). For one thing, we’re seeing a massive demand drop in automotive traffic as non-essential operations have shifted remotely. Second, the rise of alternative transportation, in particular electric vehicles, represents a long-term headwind for MXC stock.
Then again, we’re in the new normal. Specifically, we’re in a Robinhood kind of normal where companies jump higher for seemingly irrational reasons; case in point is Hertz Global Holdings (NYSE:HTZ). With millions of Americans working from home and in some cases getting sweet unemployment checks from their state benefits offices and Uncle Sam, I suppose day trading was inevitable.
Now, I’m not entirely sure if that explains some of the wildness in MXC stock. As our own William White explained, shares launched into orbit on July 22 despite the lack of any news. Therefore, the only reason Mexco jumped higher was due to aberrant trading dynamics.
That said, the case for MXC stock doesn’t exclusively revolve around unpredictable events. Most significantly, we’re in a record-breaking hurricane season, with storms threatening the Gulf of Mexico. As a result, more than half of the region’s oil production was shut down, boosting oil prices.
Moreover, airliner stocks took off earlier this week from on optimism from a novel coronavirus vaccine. Specifically, a Covid-19 vaccine candidate from AstraZeneca (NYSE:AZN) may receive fast-track approval from the U.S. government. Just as well, new daily infections have steadily declined, suggesting that a broader economic recovery is just over the horizon.
But is this enough to justify a speculative shot on Mexco?
Why MXC Stock Remains Speculative
Admittedly, the robust enthusiasm toward airliners is a tempting proposition to return to the bullish argument for oil stocks. If people are willing to travel in a flying tube with hundreds of other strangers, that means they’re more than willing to drive. Logically, oil prices should move higher, boosting MXC stock.
However, we’ve seen this story before where investor sentiment went far ahead of the fundamentals. Starting from mid-May, the airliners picked up tremendous steam into early June. A surprisingly positive May jobs report capped off this incredible rally.
Unfortunately, coronavirus cases also surged, causing the air travel industry to retreat. I’m not suggesting that’s going to happen again. But if demand was really strong for travel, someone needs to tell American Airlines (NASDAQ:AAL). Management made the gut-wrenching decision to lay off 17,500 frontline workers.
Thanks for all that you do! Now get the heck out of here! That doesn’t sound like demand is returning.
Another problem is that oil demand in other sectors is deflated as well. For instance, you just need to look at traffic levels in Los Angeles, one of the biggest – if not the biggest – motor capitals of the world. Automotive congestion is down 63% year-over-year, which is not too far off from the 66% to 70% loss in airliner passengers over recent days.
Sure, the storms impacting the Gulf of Mexico will constrain supply. Under normal economic conditions, a decrease in supply for a relevant, necessary commodity should boost demand. But I doubt that we’ll see Economics 101 play out so neatly this time for MXC stock.
We’re not too far off from the time when oil prices dipped into negative territory. Until the demand picture substantively improves, the supply situation really doesn’t matter.
A Musical Chairs Business
If you head on over to Mexco’s website, you’ll see that it is “engaged in acquiring and developing oil and gas properties and the exploration for and production of oil and gas.” Again, if we’re in any other circumstance, I’d love to have an independent oil company with assets exclusively located in the U.S. under my portfolio.
But in the present environment, this is not a relevant business. Further, the transition to a return to normal will be exactly that, a transition. Probably, the transition won’t occur overnight. Even if it did, I think you’d have to expect more layoffs in the future.
Of course, the soaring Nasdaq Composite index is an encouraging sign. However, these tech companies have to sell their products and services to someone. With a loss of revenue due to a bifurcated economy, those layoffs are almost surely coming.
Finally, MXC stock is a commodity-based investment. There are many like it. Without much opportunity for differentiation, I’d stay away from it.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
