ExxonMobil (NYSE:XOM) stock has become a battleground. Activists, not traders, are doing most of the battling.
Activist investors, including plucky hedge fund Engine No. 1 have demanded (and won) multiple seats on ExxonMobil’s board of directors. These activists claim that Exxon hasn’t done enough to fight climate change and carry out its operations in a sustainable manner.
Many owners of Exxon’s shares are worried about this situation. After all, how is an oil company supposed to function when its directors are increasingly focused on other issues?
People are nervous that ExxonMobil’s business will be hurt, causing its profitability to decline. However, before dumping XOM stock, here are some points to consider.
Separating Fear From Reality
There’s been a great deal of concern about how ExxonMobil’s battle with activists will impact the company. Certainly, it faces a more complicated path forward now that is has to more actively weigh environmental, social, and governance (ESG) concerns when it’s making decisions.
However, nothing to which ExxonMobil has committed will wreck the company’s existing business. Indeed, Exxon has changed its strategic outlook far less than major European oil companies such as TotalEnergies (NYSE:TTE) which have actively moved away from fossil fuels and are becoming full-fledged green energy plays.
ExxonMobil, by contrast, was still trying to grow its oil and gas production right up until Covid-19 hit. In fact, it launched a bunch of new projects, such as its mega-field in offshore Guyana, that will keep delivering crude oil for many years to come.
The Dividend Is Secure
For years, the biggest complaint about XOM stock was that its dividend was unsafe. Since about 2015, ExxonMobil has struggled to ensure that its operating cash flow was higher than its dividend costs.
That doesn’t mean that Exxon was losing money during most of those years. It’s still a well-managed, low-cost producer that can survive downturns.
However, Exxon wasn’t generating enough cash to fund its operations, develop new projects, and pay its dividend . However, since ExxonMobil has staked its reputation on having a large dividend that it increases every year, it wasn’t willing to cut its payout, despite its difficulties.
As a result, ExxonMobil added more than $30 billion to its debt, primarily in order to avoid slashing its dividend. Analysts criticized ExxonMobil for this decision, saying the company was mortgaging its future.
However, it looks like Exxon’s management will get the last laugh. With oil prices near their highest levels in more than five years, Exxon’s cash flow is poised to rebound mightily.
That, in turn, will alleviate concerns about dividend cuts and will ensure that the company’s loyal shareholder base, i.e. its income investors, stay the course.
With so many other oil companies having already slashed their dividends, Exxon has gained some credibility as one of the very few firms in the sector that did not do so when oil prices were quite low.
The Great Oil Short Squeeze Is Coming
The reasons why oil is likely to rise are simple, yet powerful. When leading oil companies are told that they can no longer drill in new oil finds, new supplies of petroleum drops. Meanwhile, the world’s oil demand keeps creeping higher.
That’s precisely what’s happening today. The International Energy Agency (IEA) recently urged its member states to stop approving new oil and gas projects starting now.
Not all countries will comply, of course, but the IEA’s statement was momentous nonetheless. Meanwhile, ESG funds – which control a huge part of the overall stock market via pensions and other institutional money – are dumping all oil and gas stocks that don’t quickly become carbon neutral.
Governments and some major investors are urging oil and gas companies to stop exploiting new supplies of oil.
Demand for oil, however, is roaring back to life as the pandemic fades. Leading countries such as China are now already using more oil than they did in 2019. The U.S. isn’t that far behind. Analysts expect global demand for oil to leap another 5 million barrels per day by the end of this year (against supply of around 97 million barrels per day), thanks to the reopening. of major economies
For the past decade, the U.S. was the marginal producer of oil. Oil supplies from the Permian Basin, a leading fracking region in America, jumped from less than 1 million barrels per day a decade ago to nearly 5 million at its peak.
Now, as companies like Exxon stop developing marginal new sources of oil, production from such areas will quickly slide. As any economics student can tell you, when supply drops as demand simultaneously rise, prices climb meaningfully. Given the broader inflationary wave as well, it seems likely that oil prices will top $100 per barrel over the next few years.
The Verdict on XOM Stock
ExxonMobil is too large to suddenly steer itself in the opposite direction. It will take ExxonMobil years to really shrink its oil and gas fields and adopt more green energy solutions. In the interim, it will need the cash flow from its existing oil projects to fund its diversification efforts.
Consequently, ExxonMobil isn’t shutting down its oil and gas operations tomorrow or anytime soon. Sure, it will grow its production much less than investors may have anticipated. But that’s not necessarily a bad thing. After all, overproduction caused the huge 2014-2020 energy bust.
So a leaner, more focused ExxonMobil should prosper with oil prices around $75 per barrel now. For investors who want major oil companies that are more purely focused on fossil fuels, the oil sands companies like Canadian Natural (NYSE:CNQ) and Suncor (NYSE:SU) may make more sense.
Indeed, I sold some of my XOM stock to buy more of the oil sands leaders. That said, don’t overthink things too much. Oil is entering a roaring bull market, and XOM stock is set to benefit from that trend.
On the date of publication, Ian Bezek held long positions in SU, CNQ, and XOM stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.