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Carbon Tax Scenario Creates a Bullish Angle on Exxon Mobil Stock

Few traders are considering Exxon Mobil stock's potential price appreciation driver

There are a number of reasons to enter into the long side of the trade on Exxon Mobil (NYSE:XOM). For instance, you could buy Exxon Mobil stock simply because you believe the oil price will increase and you don’t want to bother with the futures market.

XOM Stock: Not Too Compelling Here
Source: Shutterstock

Granted, Exxon Mobil stock is a fairly good way to track the oil price, though the stock doesn’t follow spot oil perfectly. Another reason to own the stock is because you feel that the share price has been excessively beaten down.

As a value seeker myself, I can definitely relate to that thought process. I also appreciate a generous dividend payout, and Exxon Mobil stock offers a yield that’s hard to resist.

All of those arguments are worth considering. Yet, there’s an additional angle that most Exxon Mobil stock traders probably haven’t considered. And, combined with the other reasons to own the stock, it might just be the icing on the cake for prospective shareholders.

A Closer Look at Exxon Mobil Stock

Momentum-focused traders might not be enamored with Exxon Mobil stock lately. After the onset of the novel coronavirus and other contributing factors took the share price down, it peaked in June at around $55 but not for very long.

It was a slow, painful drawdown after that. By Sept. 21, Exxon Mobil stock had fallen all the way down to $36 and change. Suffice it to say that the bulls could really use some good news.

There is data that can provide some comfort for long-term investors, though. For one thing, income-oriented investors should appreciate Exxon Mobil stock’s forward annual dividend yield of 9.36%. Hopefully, the company won’t cut that dividend yield anytime soon.

Moreover, Exxon Mobil stock features a very reasonable trailing 12-month price-to-earnings ratio of 21.7, which should appeal to value seekers.

Putting a Price on Carbon

Not long ago, the Commodity Futures Trading Commission or CFTC published a report titled “Managing Climate Risk in the U.S. Financial System.” In it, the CFTC considered how how climate change could impact the American financial system.

The CFTC, which regulates the derivatives markets in the United States, is a powerful and influential entity. In issuing its report, the CFTC isn’t just making observations and suggestions. Most likely, it’s signaling future regulatory action.

There were numerous recommendations in the report, but the one we’ll focus on is the CFTC’s endorsement of carbon pricing, or a price that carbon-emissions polluters would have to pay.

Some folks would call this a carbon tax, though it might not necessarily be enforced by the U.S. Internal Revenue Service.

How This Will Benefit Exxon Mobil

“In the absence of such a price [on carbon emissions], financial markets will operate suboptimally, and capital will continue to flow in the wrong direction, rather than toward accelerating the transition to a net-zero emissions economy,” explained the CFTC.

It’s not difficult to imagine that regulators will, sooner or later, make it more expensive for companies to pollute. But now, we have to connect the dots and explain how a carbon tax would benefit Exxon Mobil.

Dan Clifton of Strategas Research Partners observed that integrated oil giants have actually been lobbying for a carbon tax. Their intention is to cause fossil-fuel product prices to go up.

This, in turn, would increase the production costs for small fracking companies, effectively pricing them out of the market. Call it playing hardball if you’d like, but it’s a potentially winning strategy for bigger oil and gas producers like Exxon Mobil.

The Bottom Line

We’ve touched upon a number of reasons to buy and hold Exxon Mobil stock. You might not have considered the carbon tax angle yet.

However, if future regulatory actions favor big oil and gas companies over smaller ones, then that’s a win for Exxon Mobil and its stock holders.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Article printed from InvestorPlace Media,

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