Exxon Mobil (NYSE:XOM) stock is an interesting, arguably fragile place at the moment. For active traders zeroing in on the narrowest of time frames, it’s hard to ignore that the largest U.S. oil company jumped nearly 8% on May 18.
Likewise, it would be prudent to not tempt fate and short Exxon here. Not with oil prices and demand perking up amid legitimate signs of life in the Chinese economy and with the U.S. continuing a gradual reopening from the grip of the novel coronavirus.
The other side of the Exxon story is that this isn’t your grandfather’s Exxon. It’s probably not even your dad’s Exxon. What I mean is that the oil giant was once a linchpin of supposedly stable, large-cap heavy, long-term portfolios.
However, history, including some recent chapters, is littered with examples of these types of stocks falling from grace and disappointing investors.
Price and changing energy consumption dynamics suggest that’s the trajectory Exxon is on. Six years ago, XOM stock traded around $105. Now it’s around $45.
The World’s Changing and Exxon Needs to Catch Up
Former auto industry Lee Iacocca – the man behind the Ford Mustang and the executive that saved Chrysler – used to say in commercials “Lead, follow or get out of the way.” The tagline is relevant when discussing Exxon.
A company of this heft should be a leader in more than, well, heft. Yet, Exxon largely missed out on the shale boom in the Permian Basin. Over the past decade – a period in which the S&P 500 tripled – Exxon stock lost an average of almost 11% per year while all of its rivals except for BP (NYSE:BP) generated positive returns. At least BP has “excuse” in the 2010 Deepwater Horizon disaster.
Exxon also swung and missed on big, cost-intensive projects in Canada and Russia, all that while the world was shifting away from fossil fuels to renewable energy. Unfortunately for Exxon and its oil brethren, many institutional investors are doing the same.
The movements to socially responsible and environmental, social and governance (ESG) investing are very real. Adding to the pressure on the likes of Exxon, and any other ESG offender for that matter, are data confirming that companies that prioritize sound environmental stewardship deliver superior long-term returns relative to those that do not.
ESG investing isn’t just for ordinary folks on Main Street. Whether it’s public pension funds, prestigious university endowments or large traditional money managers, more are awakening to the need of environmental priorities. At least one – the U.K.’s Legal & General Investment Management – has XOM stock in its crosshairs.
The asset manager isn’t some piddly Exxon investor. It owns $1 billion worth of the stock and plans to use that cache to push for change, including voting against CEO Darren Woods at the shareholders meeting next week.
That’s just one example, but it’s endemic of Exxon neither leading nor following in the renewable energy space. If it doesn’t swiftly act, it may be forced to get out of the way and risk being left behind to its own detriment and that of shareholders.
Bottom Line on Exxon Mobil Stock
Exxon carries a tempting dividend yield of 7.7%, but the company’s multi-decade dividend increase streak will almost assuredly end this year. That is to say, it won’t be a dividend offender, but it won’t be a grower, either.
Another problem for XOM stock is what I’ll call the rule of 50. It’s my term so give me some latitude here, but the “50” represents $50 billion in debt the company carries, but just a few years ago the balance sheet was pristine. That 50 also means $50 – the breakeven per barrel price for many of Exxon’s rivals. Exxon’s breakeven price is $75 per barrel.
Oil going to $50 isn’t far flung, but it would likely take some time to get there from the May 18 close of $32.25. That also means getting to $75 is a long way off. In the meantime, investors can do better than Exxon.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.