Posted on 08/28/2020 10:18:56 AM PDT by Signalman
The silver shimmer of Silicon Valley is replacing the oil slicks that once gilded the Dow Jones Industrial Average (DJIA) in black gold. That silver shimmer is Salesforce.com, and it's replacing the longest-tenured DJIA component: ExxonMobil (NYSE:XOM), effective Aug. 31.
Exxon's removal adds another red flag to a series of headwinds that have pushed its shares down over 40% for the year. Is there more pain ahead, or is there reason to believe Exxon can turn it around?
The fall of ExxonMobil Going back a few years further to 2007, Exxon was the largest company by market capitalization. Limited supply and rising demand led to high oil prices that pole-vaulted revenues and profits to new heights. As the oil industry's leader, Exxon became a staple in market indexes and a key holding for investors young and old.
During the height of the Great Recession, oil endured immense volatility, with the monthly average for WTI crude reaching as high as $133.88 per barrel in June 2008 and then as low as $41.12 that December. After a brief setback, oil prices took to the skies, averaging over $90 a barrel for the five year period between 2010 to 2014.
After the oil crash of 2015, prices never recovered, and neither have Exxon's earnings.
ts stock has lost value over the past 20 years compared to an increase of over 130% for the S&P 500.=
Exxon's stock has fallen for more than the simple fact that oil is out of favor. In cold hard numbers, Exxon simply isn't making as much as it was in the golden period between 2005 and the beginning of 2015. On top of that, its debt burden is ballooning and its free cash flow (FCF) has gone negative as a result of the COVID-19 pandemic's impact on oil and gas demand and prices.
Exxon would argue that its investment thesis remains strong. Oil still dominates the transportation industry and natural gas is the United States' leading fuel source for power generation.https://www.eia.gov/tools/faqs/faq.php?id=427&t=3
Exxon points to developing countries as a primary growth market for oil and gas, pointing to fossil fuels' competitiveness with renewables in emerging markets. Before the onset of the pandemic, Exxon expected its earnings could double by 2025 in a moderate pricing environment.
What Exxon needs is a stable oil price where it can reach the margins needed to pay a growing dividend and achieve its long term production goals. For that to happen, Exxon would like for oil demand to start outpacing supply. However, that's partially dependent on the energy mix of developed and developing economies as well as the investment appetite of its key competitors. Given recent decisions by rival majors Royal Dutch Shell, BP, and Equinor, there's reason to believe that Exxon's competitors would rather be renewable energy stocks than compete in oil and gas over the long term.
Can Exxon reenter the DJIA? Removal from the DJIA isn't necessarily a perpetual banishment. On August 31, Honeywell International (NYSE:HON), the third-largest U.S. industrial stock by market capitalization, will re-enter the Dow after a 12-year hiatus.
In Honeywell's case, the reentry is well deserved. The company has one of the best balance sheets in the industry and has outperformed the broader markets since its departure. Its future looks bright as it grows market share in its core business and expands further into operational technology (OT) and the industrial internet of things (IIoT).
In Exxon's case, S&P Global made it clear that it was reducing redundancies in the index and adding new companies to better reflect the economy. That came in the form of removing Exxon but keeping Chevron. Therefore, a comeback for Exxon could mean that it either has to outright outperform Chevron, post years of stable earnings growth and reduce its debt, oil and gas as a whole regains favor, or some combination of the three.
Standard Oil.
The Dow Jones “Average” is an intellectual fraud.
Exxon, General Electric, ATT, US Steel, Microsoft, Ford, etc... list goes on. Help me out if you’d like.
All of them at one time the #1 sized company in the world based upon market cap. Each took a massive bath afterwards, some never to remotely recover.
AAPL, Goog, etc...they will too see their day of reckoning. Unless somehow....”this time is different”.
Exxon investors must be very Humble.
What? I’m supposed to worry? If Exxon goes down there will be no one to sell gasoline?
LOLOL. Let the corrupt and incompetent fail.
It’s kind of sad; I still own a little bit of it, but definitely an under performer.
Decent dividends, as I recall.
I think the history of the Dow Jones and other such lists, shows that companies have come and gone from such listings of the largest companies on the New York Stock Exchange.
I thought Exxon was one of the largest companies of any kind in the world. So I am surprised they would not make the cut for the Dow Jones 30 industrials anymore.
Exxon will be back.
LOL, I see what you did there, with mentioning being Humble. I wonder if others are of a certain age and see what you did there.
It means only one thing: There is more or less a global recession derived from government actions, globally, in response to a viral epidemic. In this recession nearly all modes of transport - land, sea and air, have drastically cut back, and due to that the global price of fuel is down.
As the pandemic recedes, so will the recession and all forms of transport will pick up, and when they do the global price of fuel will rise again, as will the stocks of the producers of fuels for transport.
I would say now may be a good time to buy Exxon.
AT&T is a passenger steamship lines, a fine one, facing the advent of passenger air travel as an affordable alternative. Or saddle and harness makers watching the model-T come off the assembly line. Great at what they do, but what they do is not where the market is going.
They thought they had a manifest destiny to be your telecom company, but alas, telecoms, like email and ‘search’ are functions NO ONE *wants* to pay for.
I for one saw what he did there.
Rex Tillerson legacy I believe it was him that turned the company from anti-Global warming to a major driver of Global warming against the stock holders that told them to say out of it.
Exxon still exists? Wow.
And Texxon is there!
It’s hard to be humble about such witty posts.
100 years - not a pump and dump stock.
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