I bought Exxon Mobil stock for $48.85 back in February. Since, the energy sector has dropped lower and shares trade for about $36. And I’m down 26% on the position.
It doesn’t feel good to see that much red in my portfolio. And a good question to ask myself… should I cut my losses and sell?
For my short-answer, no… my original thesis remains intact. In fact, it might be an even better buying opportunity.
In the article or video below, I’m going to show you why I originally bought a stake in Exxon Mobil. Of course, it’s not a guaranteed win. Nothing is when it comes to investing, but I like the potential risk-to-reward going forward, even more so now.
Why Should I Not Invest in Exxon Mobil Stock?
To start out, it’s important to ask, why should I not invest in this sector and company. Well, the elephant in the room is the move to renewable energy. I’m looking forward to a renewables-only future, but I try to be a pragmatic investor.
All of us continue to benefit from fossil fuels. The energy you’re using to see this article likely came from fossil fuels. The same is true for heating and cooling your home, as well as much more. Overall, the use of fossil fuels has benefited billions of people around the world, and continues to do so.
Of course, there are downsides… but I often find it ironic when people take such a strong stance against fossil fuels… and yet, they still benefit from it every day. They could pay more to reduce the use of fossil fuels in their own lives, but they usually don’t… It’s easy to call out a problem and tell others to solve it at their own expense.
Ultimately it comes down to cost effectiveness. And on that end, fossil fuels will continue to be a leader in most areas for easily the next decade plus.
Still, renewable energy production is growing. And once again, I think that’s great! This chart from the EIA shows electricity generation projections for renewables, natural gas, nuclear and coal…
The EIA expects the share of renewables to double by 2050. And as a whole, total generation with this mix of fuels grows by about 25%. Also, natural gas continues to make up a large piece of the total.
Even if renewables grow at a slightly faster rate, the big oil companies should be able to pump out steady cashflows over the next few decades.
Short-term Pressure, Looming Dividend Cut and Buying Opportunities
It’s been tough in the short-term and even mid-term… but oil supply and demand will balance out.
A huge amount of supply has come online over the last decade and that’s helped keep oil prices lower. And more recently, with more people working from home and travel restrictions, the demand for oil has dropped. This has added even more downward pressure to fuel prices.
As a result, this will lead to more oil bankruptcies. And the supermajors, like Exxon Mobil, are seeing some financial stress. Exxon has reported three quarters in a row of small losses. That’s based on net income and the company has also taken out an extra $10 billion in debt. Although, with an investment grade credit rating of AA+ and low interest rates, I’m not worried much about that. The leverage ratios aren’t too concerning.
Exxon still has a healthy balance sheet but the dividend doesn’t look as safe anymore. There’s a higher chance of a dividend cut and management could likely put those funds to better use, like picking up some fire sale deals from the coming wave of bankruptcies.
Overall, Exxon Mobil won’t be disappearing anytime soon. It’s still a strong leader in the energy industry and fossil fuels will continue to dominate for a few decades. Investors have beaten it down and I believe that is only partially justified, due to the short-term shock in 2020. The stock is in oversold territory and the risk-to-reward potential still looks great.
I’ve even considered doubling down but I’m not willing to put that much of my portfolio into fossil fuels. I still need to diversify to sleep well at night. On top of that, I’m not automatically reinvesting the dividends. Instead, I let them pool up to buy into other opportunities.
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