This pandemic has accelerated change in markets everywhere. And maybe nowhere is this truer than in the energy sector. For instance, Exxon Mobil (NYSE:XOM) has defined energy for decades, becoming one of the world’s most powerful companies. Now, though, XOM stock is faltering and oil isn’t the only energy option. In fact, demand for Exxon’s product seems to be headed for a permanent fall.
So, what once looked like a solid dividend stock with capital growth is now more like a cigarette company with declining demand. Currently, Exxon shares are down over 39% year-to-date (YTD). Plus, its market capitalization has fallen to $180.5 billion despite a dividend yield of 8.24%.
Worse, few analysts are calling it a bargain. Out of the 10 anlaysts followed by Tipranks, only one says XOM is a buy.
XOM Stock: Are Oil Prices Firming?
To really understand XOM stock, though, we need to look at the price of oil. West Texas Intermediate (WTI) oil — the most-watched U.S. grade — is trading today at around $47 per barrel. It started the year at over $60.
On the surface, that’s not so bad. But consider those sickening moments in April, when demand collapsed and you had to pay to take it. WTI traded for under $40 per barrel for several months.
Now, however, analysts at Oilprice.com insist the market is about to recover. For one, prices have firmed since November. Plus, the supply overhang has fallen by 75 million barrels, the equivalent of 26 days’ supply. According to them, a “level of restraint being applied to new drilling in U.S Shale plays” has also helped buoy prices.
Meanwhile, vaccines for Covid-19 are also coming out and the Organization of the Petroleum Exporting Countries (OPEC) has agreed to set only modest production increases for next year. Traders haven’t been this bullish since August. Many insist the excitement over electric vehicles is overdone.
Too Much Supply
So, Exxon’s latest South American strikes should have buoyed the market, or at least XOM stock, right? Well, instead, word of new supplies there and off Africa have traders realizing oil is more abundant than they thought. Despite falling production budgets, Rystad Energy projects a “new normal” of 10 billion barrels of oil discovered per year in the coming years.
What’s more, the U.S. Energy Information Agency (EIA) now projects oil prices will average $49 per barrel in 2021 with demand just below 2019 levels. The problem is that supply will also increase by 5.8 million barrels per day in the new year.
Exxon’s capital plan for 2021, released early in December, reflects this. The company will take a $17 billion to $20 billion “impairment” charge for the current quarter, abandoning fruitless gas assets in Canada, the U.S. and Argentina. It also plans to invest $16 billion to $19 billion next year in the Permian Basin (a region in Texas and New Mexico) as well as off Guyana. In the latter, XOM has found the equivalent of 8 billion barrels. The company also has a 28% share in speculative drilling nearby, off Brazil.
In other words, Exxon can’t rely on enough increasing demand or shorter supply in years to come to make it a long-term winner.
Currently, the psychology of the oil market appears to be broken.
How? For one, the assumption that oil in the ground will always be worth as much, or more, than current production has collapsed. Additionally, the rise of Tesla (NASDAQ:TSLA) and other electric car companies like Nio (NYSE:NIO), Workhorse (NASDAQ:WKHS) and more has traders worrying about future demand.
Now, XOM stock has gone from being a stock everyone needs to a speculation.
But as a speculation, it’s a fine one for 2021. Exxon now has a market cap on par with Oracle (NYSE:ORCL), the database company that just announced a move to Texas. Given the dividend, putting a little money into the stock currently seems like a no-brainer.
Plus, market psychology does change. If it does, you’ll see a huge capital gain. And even if it doesn’t, you should continue to get a very fat dividend yield from this name.
Just be plenty careful. Don’t throw everything at Exxon and be prepared to abandon ship when the psychology switches back. Why? Rising oil prices will only make more people want to harvest sunlight, wind and the tides for energy. As I have been saying for a decade, there is no shortage of energy out there.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.