As Uncertainty Remains, Hold Off From Buying Exxon

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Is there any reason to buy Exxon Mobil (NYSE:XOM) today? The S&P 500 has made a full recovery. But Exxon Mobil stock remains far below from where it was before the novel coronavirus.

Exxon Mobil Stock
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Sure, shares have recovered from their March pandemic-driven lows. Yet, with few catalysts on the horizon, it’s safe to say the stock could remain stuck in neutral for quite some time.

For those holding Exxon for the dividend, this may provide some relief. Yet, that’s not to say shares can’t head lower from here. Sure, much of the company’s pandemic headwinds are priced into the stock. But the risk oil prices fail to rise further, coupled with the climbing risks of a dividend cut, could mean shares could start trending lower again.

Yet, that’s not the only way this story could play out. If a much-anticipated coronavirus vaccine becomes available later this year, all bets are off. We could see a rapid recovery in oil demand, helping to put points back into the company’s hard-hit shares.

Even so, that remains a big “if” for now. With this in mind, staying on the sidelines may be the best move for now.

Exxon Mobil Stock and the Dividend

Currently, an oil price recovery remains years off. Based on recent International Energy Agency (IEA) projections, 2021 demand levels will remain slightly below demand for 2019. Granted, if low oil prices continue to discourage new exploration, a decrease in supply could help bolster prices.

Yet, with OPEC members softening their production curbs, who’s to say we won’t still be drowning in a glut of oil next year? Simply put, guessing where oil prices are going to go remains a game of predicting the unpredictable.

So, where does leave Exxon Mobil stock? Chances are, stuck in neutral. For those interested in the stock for its high 7.9% dividend yield, that may be a positive. In theory, you could buy shares today, and collect the nearly 8% yield, with minimal risk shares head lower from today’s prices ($43.20 per share).

But, although pandemic headwinds remain largely priced into the stock, the current generous dividend can’t go on indefinitely.

As InvestorPlace’s Todd Shriber wrote Aug. 10, Exxon Mobil is making aggressive moves to defend its current dividend payout. Cutting costs to the bone, and borrowing billions, the company is still able to keep up with the current payout levels. Yet, if low oil prices continue, something is going to give.

Either the company will finally make a dividend cut. Or, the company keeps the dividend as-is, but continues levering up its balance sheet. Neither outcome bodes well long-term for the company’s share price.

Nevertheless, those taking a contrarian approach may see value in Exxon Mobil stock today. While prospects look dim, the possibility of a rapid recovery later this year is still on the table.

Why Shares Could Surprise Later This Year

Given you can build a strong bull case for Exxon right now, should you go short? Not so fast! Sure, as I detailed above, there’s good reason why the company’s stubbornness regarding the dividend could push shares lower.

But, remember what I said about “predicting the unpredictable?” That works both ways. On one hand, it’s hard to tell whether oil prices can continue climbing back, or if they’ll tread water at today’s prices.

On the other hand, a game-changer like a coronavirus vaccine could jolt some life into this and the other oil stocks.

How so? As InvestorPlace contributor Larry Ramer wrote Aug. 6, the availability of a vaccine later this year could lead to a rapid surge in oil demand. This will help breathe some life back into Exxon Mobil stock. Granted, there’s no guarantee we’ll have a viable vaccine that quickly. Yet, those willing to go against the grain could see big rewards if such a scenario plays out.

Stay on the Sidelines for Now

Simply put, things could go either way for Exxon right now. On one hand, oil prices could remain depressed well into 2021. That means the company will continue losing money, forcing it to either slash its dividend, or continue levering its balance sheet just to keep up with the payouts.

On the other hand, a game-changer could be on the horizon. With the potential for a Covid-19 vaccine to bring the economy (and oil demand) back to normal, buying now, while oil stocks remain out of favor, could be a great opportunity.

So, what’s the call? As things could go either way, hold off buying Exxon Mobil stock for now.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


Article printed from InvestorPlace Media, https://investorplace.com/2020/08/uncertainty-remains-hold-off-buying-exxon-mobil-stock/.

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