When Donald Trump took office in 2016, he promised to revitalize the fossil fuel industry by allowing more drilling and cutting federal regulations. Investors cheered, sending Exxon (NYSE:XOM) stock by almost 25%. By the time former Exxon CEO Rex Tillerson joined as Mr. Trump’s Secretary of State in 2017, Big Oil seemed unstoppable.
Over the next several years, however, Mr. Trump’s energy plan would prove disastrous for the fossil fuel industry.
With the 2020 election still in the air, investors might see a President Joe Biden as yet another reason to sell out of fossil fuel companies, including Exxon.
But that takes too narrow a focus: Biden’s Clean Energy Plan will help Exxon in the short run by cutting production and shoring up prices, at least in the short run.
And in the long run, that could help Exxon go green like its European counterparts, rewarding investors along the way.
XOM Stock: Hammered by Low Prices
Exxon’s leaders have typically shown long-term thinking in capital investment. Over the years, the oil “super-major” had diligently gathered some of the world’s lowest cost of supply by buying when commodity prices declined.
Its investment in downstream capacity also meant that the company could convert up to 80% of its feedstocks into value-added fuels and chemicals. When Trump became President in 2016, Exxon was one of only three companies with the highest Aaa rating from Moody’s.
That calculus, however, went out of the window when Trump took office. By opening federal lands to fracking and cutting emission regulations, Donald Trump opened the floodgates for new fossil fuel players.
The U.S. jumped from the #3 producer of oil (behind Saudi Arabia and Russia) to #1 by 2019. And energy prices cratered, sending XOM stock down with it.
Under Trump, Henry Hub, the price index of U.S. natural gas, plummeted 40% from $4.33 to $2.66.
That’s an enormous degree in a world where even several percentage points can turn a profitable well into an unprofitable one. Operating margins at Exxon, which also produces natural gas, collapsed from 10% to 5%.
Not all of this was under the President’s control – a failed OPEC meeting in March between Saudi Arabia and Russia caused oil prices to plunge 24% in a single day.
Nor was Trump’s energy policy without benefits – low energy prices kept inflation down for millions of Americans, putting millions back into consumer’s pockets. It also meant the U.S. became a net exporter of fossil fuels.
“At the beginning of the decade, energy independence was still a joke for late-night television comedians,” said author Daniel Yergin, Vice Chairman at IHS Markit. “Turn around a decade later, and we’re here.”
But Trump’s policies were undoubtedly a contributor to low prices, which have threatened the oil majors’ stability.
In August, Exxon warned that the company might have to write down as much as 20% of its proved reserves if energy prices remain low.
Can Biden Save Big Oil?
A Biden presidency could be the shot-in-the-arm that Exxon needs to survive.
In the short-run, Biden will likely reverse much of Trump’s EPA rollbacks. His administration will also make it harder for companies to buy new drilling rights on federal lands at fire-sale prices.
These actions would shore up U.S. energy prices, giving Exxon a much-needed short-term boost. Its stock price could recover to $65, a 100% upside, as feedstocks and downstream product prices recover.
In the longer run, Biden’s Clean Energy Plan will bring much-needed clarity to Exxon’s decision-making process. It can easily take years to turn undeveloped oil fields into producing wells.
A consistent political direction (even one that cuts carbon emissions to net-zero by 2050) is essential to help Exxon’s typically far-sighted management create a workable investment strategy.
Most importantly, a consistent green energy policy could finally push Exxon into the 21st century.
A 2019 study by Energy Strategy Reviews found that Exxon lags all other super-majors in clean and energy; the U.S-based oil producer invests zero capital investment into renewables and doesn’t even have a dedicated renewable team.
Contrast that with Exxon’s European competitors, Royal Dutch Shell (NYSE:RDS.A) and Total (NYSE:TOT). Shell invests around $1 billion per year in solar, wind and energy storage investments, while Total puts in $500 million into hydropower and other renewable sources.
It’s not a massive amount yet. But it lays the groundwork for the super-majors’ move into clean energy production.
Is XOM Stock a Good Investment?
Investors have long turned to Exxon for its high credit rating and consistent dividend. People reasoned, even if the U.S. reduced oil consumption, emerging markets would more than make up the demand.
That’s no longer the case.
With China’s 2060 carbon-neutral target (and India’s CO2 emissions falling for the first time since 1982), it’s easy to see a world where oil demand falls in the next two decades.
Prices of natural gas, which has long held a link with oil, will also struggle. That means Exxon should cut its dividend and move into cleaner energy.
Yes, doing so will dethrone the company from its long-held “Dividend Aristocrat” status, an honor awarded to companies with over 25 years of rising dividends.
But that would save the company almost $15 billion per year, a princely amount that could get spent on renewable energy R&D.
Other American companies have already started moving in that direction. General Electric (NYSE:GE), which produces turbines for coal and gas-fired power plants, has invested heavily in wind, hydro and solar technologies.
If Exxon can make that same leap, the company could build a new empire in chemicals, specialty fuels, and renewable energy.
Get the mix right, and regardless of who wins the 2020 election, the company’s 0.8x price-to-book valuation looks like a steal. But under a second Trump presidency, it will certainly be a longer road.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.