Exxon Mobil (NYSE:XOM) stock faces a very tough operating environment currently. Investors know this is of course true for all of the oil majors. Overall, there are several powerful macroeconomic factors keeping share prices down. The largest long term of which is the world economy weaning itself off of oil. But that transition won’t be as rapid as some pundits might have investors believe.
And of course there’s the novel coronavirus pandemic. As it drags on, it drags down energy stock hopes. Potential XOM stock investors are caught wondering whether to be bearish or bullish with all of the news. XOM shares trade around $34 now, which is decline of approximately 52% year to date. So, some investors may believe they can buy, hold and bank a nice profit on an imminent rebound.
Yet there are longer-term questions. Immediately the question of the pandemic is of concern. No one knows when it will end. Beyond that, consumers and markets are championing alternative energy.
And beyond the myriad questions surrounding oil at large, individual operators within the sector have individual circumstances. Exxon Mobil is not Chevron (NYSE:CVX), Chevron is not BP (NYSE:BP) and so on and so forth.
The idea that pundits push of oil already being in downturn is exaggerated. Yes, current demand has been gutted by the pandemic. But according to the IEA’s annual World Energy Outlook 2020 report peak oil demand isn’t set to occur before 2040. So, XOM stock investors do not have to worry about that as an immediate issue despite rampant claims to the contrary.
The unsubstantiated idea that alternative fuel demand has superseded oil for the world’s energy needs are simply not true. This argument underlies too many discussions around energy these days. But more important to this argument is the data suggesting that oil demand is actually rising.
Exxon Mobil is subject to the prevailing supply and demand issues around oil. These have not been kind this year. The pandemic has gutted oil demand. That is the prevailing story around demand in 2020. The other factor is supply. Overarching issues include a decline in new upstream projects combined with the normal decline in field production over time. That suggests that there could be supply issues to address beyond those which occur regularly.
The result is prices that are predicted to be stagnant for some time yet. The World Bank expects that oil will have an average price of $44 per barrel in 2021. The U.S. Energy Information Administration predicts a higher $49.53 per barrel in 2021.
This does not bode well for Exxon. Energyintel.com recently stated that Exxon’s break even oil price per barrel for 2021 is $65. The site also forecast oil at $58 per barrel 2021 — higher than the previous two figures I mentioned. Exxon loses money in each of those three situations. Of course, forecasts do turn out to be wrong. But Exxon Mobil first needs for the pandemic to end. People will then drive cars, and oil demand will rise. Then perhaps the calculus of Exxon’s situation might change, but not before.
Vaccines Drive Demand
The pandemic only ends when a vaccine is developed and available. It looks like that will probably be some time early to mid 2021. And that time horizon paired with recent record high daily reported cases looks bleak.
For Exxon this means that a continued bleak operating environment looks likely.
The Bottom Line on XOM Stock
XOM stock carries a massive 10.21% dividend which it will either continue or cut on Oct. 29. The company is between a rock and a hard place with its dividend. Decrease it and investors should selloff XOM stock in large numbers, triggering a price decline. But to maintain the dividend Exxon needs to come up with a lot of cash. But the company is taking on debt right now and is not flush with cash.
It did pay the dividend in Q2, while booking a negative $4.4 billion in free cash flows. And the company has steadfastly maintained its commitment to paying the dividend. But this dividend costs Exxon $3.2 billion each quarter.
There are suggestions that the company may be cutting jobs to reduce expenses. The company could borrow more money to fund the dividend. Or it could perhaps sell some of its assets. My feeling is that Exxon pays the upcoming dividend in full, and perhaps does so again in Q1 2021. But sooner or later, it becomes prohibitively difficult to continue to do so.
Add it all up together, and there doesn’t look to be a discernible bright spot in the current Exxon Mobil narrative. By no means do I think it is in any immediate trouble, but I don’t think it can rise for a few quarters either. Exxon Mobil has been very committed to its operating style. It doesn’t work in the current environment. Ultimately, I do think it will be higher this time next year. But not much sooner.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.