Exxon Mobil (XOM) is in the midst of an impressive turnaround. The stock is up 88% from its March lows. Yet, the bulk of its gains have come in the last few weeks, following Pfizer’s (PFE) positive clinical results for its coronavirus vaccine candidate on November 9th.
Given the likelihood that oil demand increases sharply next year due to the coronavirus vaccine, in addition to some other bullish factors, XOM is likely to continue to outperform in 2021.
XOM is a multinational energy conglomerate. Currently, the company produces 3.9 million barrels of oil per day. It also controls about 1% of the world’s oil reserves. It has exposure to multiple parts of the energy industry like exploration, drilling, refining, and distribution. XOM also pays an 8% dividend.
Exxon’s Fall From Grace
In 2008, XOM was the most valuable company listed on the US markets. Now, it’s the 43rd most valuable company. XOM’s fall mirrors the changing narrative around oil prices.
Back in 2008, oil prices were climbing above $150 per barrel. There was a belief among many that oil prices would keep climbing higher in perpetuity.
However, oil’s ascent was interrupted by the financial crisis and Great Recession. High oil prices also led to tremendous amounts of investment into research and development (R&D) and capital expenditures to tap new sources of supply. It also made alternative energy projects more viable.
The fruits of these efforts were realized as the supply of oil increased especially from North America due to oil sands in Canada and shale patches in the Appalachian region, Texas, and Oklahoma. As a result, oil prices fell dramatically and are currently trading at about $47.
As oil prices dropped, so did XOM’s stock price. From 2014 until today, the stock is down 47%. This situation has also come with its own narrative, which as an inverse of 2008,that oil demand may have permanently peaked as alternative energy use increases and electric vehicle (EV) penetration is forecasted to grow dramatically.
Some believers of this new narrative might argue that XOM’s recent rebound is more of an oversold bounce that will roll over as investors sell into the positive vaccine news. However, I believe that the rebound is an indication of a genuine trend change for energy stocks. It’s likely that this is the beginning of a multiyear, bull market for the sector. Therefore, investors should use dips as buying opportunities rather than sell into strength.
I believe that the “new narrative” is as faulty as the “old narrative.” Oil demand forecasts have been quite bullish. Even at the depths of the coronavirus crisis, oil demand was only 30% lower from 2019 levels. Currently, as economic activity continues to pick up, oil demand is only down 10% from 2019 levels. Given this trend, it’s likely that oil demand in 2021 may be above 2019 levels, especially with travel expected to be higher than normal.
In addition, oil production is unlikely to return to 2019 levels as quickly, which means a lower supply. Due to persistently low oil prices and the recent plunge, new investments in offshore drilling, shale, and oil sands projects have dried up as these are only viable at higher prices.
Also, budgets for exploration have also decreased in-line with prices as well. This is reflected in rig counts hitting a multi decade low.
Parallels between 1998-2000 and Now
There are some striking similarities between the oil market now, and the beginning of its last bull market in 1998. During this period, oil was coming out of an extended bear market. The bear market had also led to a steep drop in exploration budgets and poor sentiment regarding the sector.
Just like today, there was a fascination with tech stocks due to their strong outperformance over the preceding years. When the dotcom bubble burst in 2000, energy stocks grabbed the baton and began outperforming. Demand was quite strong due to strong growth in emerging markets. Prices kept moving higher, as years of low CAPEX, meant that production was not able to immediately increase.
I believe that we are in a similar situation. Oil demand has been quite resilient and is likely to accelerate next year with the world returning to normal and pent-up demand unleashed for travel. However, the weakness in oil prices over the last five years has led to diminished CAPEX which means that production is unlikely to quickly rebound.
I believe XOM is an attractive investment opportunity.
Many stocks have rebounded back to their 2019 levels. However, XOM is one stock that is still trading about 28% below it’s February 2020 levels.
Often, great opportunities come when one can buy a disliked asset with improving fundamentals. This is an ingredient for multiple and earnings expansion. XOM also offers investors the opportunity to lock in an 8% dividend which is quite attractive compared to the 10-year Treasury’s 0.92% yield, and the S&P 500’s 1.5% yield.
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XOM shares rose $0.06 (+0.14%) in after-hours trading Wednesday. Year-to-date, XOM has declined -32.37%, versus a 16.66% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles.Exxon Mobil is a Top Stock Pick for 2021 appeared first on StockNews.com