Investors in the beleaguered oil giant Exxon Mobil (NYSE:XOM) stock have had better days in the past. Year-to-date XOM stock is down 49%. Similarly, the Dow Jones U.S. Oil & Gas Index is also down about 47%.
Demand and supply issues affect the price of oil, which has a crucial impact on the price of Exxon Mobil stock. Recent research by Michael Jefferson of ESCP Europe Business School, London, UK highlights, “The biggest share of oil demand after industry’s consumption comes from the transportation sector. For the OECD member countries about 50% of this comes from road transportation; 8% from aviation; 14% from petrochemicals; and 9% from the residential, commercial and agricultural sectors. About 15% comes from miscellaneous industrial activities.”
Initially, the muted demand in the early weeks of the lockdown hit Exxon Mobil shares hard. But they staged a remarkable recovery until early June when XOM stock saw a recent high of $55.36. However it is now hovering at $36 and it is increasingly looking like the shares may re-test the 52-week low hit on March 23. If you are not currently a shareholder in Exxon Mobil stock, then you may consider waiting on the sidelines in the coming weeks. Here’s why.
How Q2 Earnings Came
Oil comes in different grades. Wanling Huang of the University of Tulsa and Andre Varella Mollick of the University of Texas Rio Grande Valley point out that prices in Brent crude and the West Texas Intermediate (WTI) “serve as major benchmarks for the world and the U.S.”
At the start of 2020, both were above $60 per barrel. However, by March, they were around $20. Now they are both hovering at $40. The volatility in prices has affected the group’s earnings, outlook as well the price of Exxon Mobil stock.
In late July, integrated energy giant Exxon released dismal Q2 results when it lost $1.080 billion. Revenue declined by 41.9% sequentially and 52.8% YoY. The group reports revenue in three main segments: Upstream, Downstream, and Chemical.
In Upstream, liquids volumes were down 7% from first quarter reflecting the impact of lower demand. Natural gas volumes were 15% lower driven by seasonal demand in Europe and scheduled maintenance.
Similarly, in Downstream, industry fuels margins were considerably lower than in Q1, reflecting the impacts of COVID-19 on demand for gasoline and jet fuel. Exxon Mobil Stock also had to take unfavorable mark-to-market derivative impacts associated with its trading activity. Finally, Chemical sales volumes were also lower than first quarter driven by the impacts of the pandemic on global demand.
CEO Darren Woods said, “The global pandemic and oversupply conditions significantly impacted our second quarter financial results with lower prices, margins, and sales volumes.” Since the release of the results Exxon mobil stock is down about 18%.
What Else Could Derail Exxon Mobil Stock
While second wave of Covid-19 infections are hitting a large number of countries, economists concur that global economic recovery in the final quarter of the year is likely to be muted. The short-term fortunes of investors in oil companies, such as Exxon Mobil stock, have always been linked to the price of oil. In the case of a slow economic recovery worldwide, oil prices may once again go toward the $30-level or even below. Then, XOM shares are likely to suffer more.
In his article, Mr. Jefferson concludes, “A lot of planned further oil exploration and production is likely to be abandoned on cost grounds and perceived weakness or uncertainty of demand… Many forces arising from the COVID-19 pandemic which have cut oil demand severely back will only permit slow recovery, thereby curbing major oil price rises due to demand weaknesses for at least three or four years.” Without demand, shares in oil majors, like Exxon Mobil stock, cannot make a sustained rally.
Finally, a potential dividend cut could negatively affect Exxon Mobil stock. The current price of Exxon Mobil stock supports a dividend yield around 9.5%. At this point, it is not possible for the company’s cash flows to cover its dividends. Unless the company takes on more debt, a dividend cut could become the only option for the oil giant. If a dividend cut is announced in the weeks ahead, passive income seekers may also abandon the shares.
The Bottom Line
So far in 2020, low levels of oil-equivalent production, pandemic-induced weak commodity prices, suppressed demand, and reduced margins have put pressure on Exxon Mobil stock. The company is expected to release Q3 results in late October. It is likely that not much has improved in the economic and fundamental environment during the quarter. Therefore, potential investors may want to analyze the next set of financial metrics before committing new capital into the shares.
Are you a contrarian investor who believes the current declines in the sector are offering value? Then you may consider buying an exchange-traded fund (ETF) that has exposure to Exxon Mobil stock, too. Examples include the Energy Select Sector SPDR Fund (NYSEARCA:XLE), the Invesco S&P 500 Enhanced Value ETF (NYSEARCA:SPVU), or the iShares Morningstar Large-Cap Value ETF (NYSEARCA:JKF).
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.