The Coming Pop in XOM Stock Will Show ExxonMobil’s Resilience

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ExxonMobil (NYSE:XOM) has been one of the worst-performing well-known stocks in the U.S. this year. Back up to say five years, and the performance of XOM stock has been equally sour.

exxon mobil (XOM) gas station

Source: Jonathan Weiss / Shutterstock.com

The novel coronavirus has only been the latest blow. In fact, ExxonMobil has been in an unrelenting downturn.

This week, XOM stock retested its low from the March crash. That, in turn, was Exxon’s lowest stock price since the 1990s. The novel coronavirus has crushed ExxonMobil’s business.

However, things could improve in a hurry. On Wednesday, Exxon announced that it is keeping its unusually large dividend in place. This ran contrary to expectations, which were that Exxon would reduce the payout.

While that is encouraging news, don’t get lost in the dividend debate. If we’re being honest, the dividend is a sideshow as far as Exxon’s future goes. What’s far more important is the company’s future profitability. And on that front, despite a record bad year, there is reason for optimism.

A Closer Look at XOM Stock

The price of oil has been low since 2015 now. Yet, XOM stock didn’t crash until this year. What changed? Simply put, the whole oil and gas environment suffered a massive blow.

Typically, when one part of Exxon’s business struggles, another part wins. So far, this hasn’t happened in 2020 though.

Exxon owns the whole logistics chain from finding and extracting oil through transporting it, refining it, and selling it to end customers. Usually if prices are low in one area of that, you get better profit margins elsewhere. For example, low oil prices often cause outsized profits in the chemicals industry, where Exxon is a big player.

However, this year, everything stopped at once. The planes stayed in their hangers and the cars in their garages. Demand for virtually all refined oil products including jet fuel, asphalt, chemicals, plastics and more went off a cliff at the same time.

Thus, Exxon’s profits got hammered as its usually resilient refining and chemicals business also veered into the red.

While this new second virus wave is a threat, there’s no indication that it will be anything like the March total economic freeze. Thus, demand should continue to stabilize and improve across various other parts of Exxon’s business in coming months. Even if oil prices stay low, Exxon can return to meaningful profitability.

Reaping the Rewards of Investment

Exxon is known for having huge scale and a fortress balance sheet. This allows it to make moves not available to smaller rivals.

In this role, Exxon decided to invest heavily in the next generation of oil and gas production in the late 2010s. Unlike other peers that abandoned new investment, Exxon took advantage of lower costs to invest heavily while the industry was in a bust.

Alas, the bust has gotten even worse in 2020. Now, Exxon has huge new oilfields such as offshore bonanza in Guyana coming online. Yet, there’s still no meaningful demand for Exxon’s new projects. At some point, however, the fact that most of the industry has stopped investing in new production will matter.

Forget About the Dividend

Most of the commentary around XOM stock focuses on its dividend. And I get it. XOM stock yields around 11% at present. Given the general interest rate environment, a yield that huge is tantalizing.

Thing is, it’s obvious that Exxon can no longer cover the dividend from cash flow. To keep paying the dividend, it has to borrow more and more money. At some point, it will decide that the additional debt isn’t worth it.

Maybe the oil market will turn up in time for Exxon to save its current dividend. Maybe not. In any case, at this point, traders were already planning on a dividend cut. In fact, it was quite a surprise on Wednesday when Exxon decided to keep the dividend at its current level for the time being.

The fact is, at this point, people are already prepared for an eventual cut if necessary, so the threat of it is no longer serving as a headwind on the stock price.

XOM Stock Verdict

I know a lot of Exxon shareholders will be celebrating this week. It’s great that the company still can pay the dividend for the time being.

However, don’t lose sight of the bigger picture. Regardless of the dividend, Exxon is positioned for a recovery as the economy returns to normal.

As key sectors such as aviation and petrochemicals roar back to life, Exxon’s profits will surge. And, unlike the competition, Exxon has invested heavily in the future. This will lead to a windfall whenever the price of oil and gas inevitably spike once again.

On the date of publication, Ian Bezek held a long position in XOM stock.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2020/11/coming-pop-com-stock-show-resilience/.

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