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.
Murdoch had to find something for his kids to do...
“S&P Dow Jones Indices LLC is a joint venture between S&P Global, the CME Group, and News Corp that was announced in 2011 and later launched in 2012.
The company’s best known indices are the S&P 500 and the Dow Jones Industrial Average (DJIA), which was created in 1896. The company also manages the oldest index in use, the Dow Jones Transportation Index, created in 1882 by Charles Dow, the founder of The Wall Street Journal.”
Esso
one of those paradigm shifts they speak of..
Yep, I remember Esso stations. The name Esso was a nod to the Standard Oil initials, S.O.
I think GE was the last company to be dropped from the DJIA among the companies in the original index back in the 1800s.
Replace a company ExxonMobil with 279 billion revenue with one of 17 billion, SalesForce.
Dow is becoming irrelevant to the true picture just as inflation stats have been gerrymandered by essentially swapping hamburger for steak.
“ I would say now may be a good time to buy Exxon”
Agreed.
November volatility aside, strong dividends and a rebounding global economy (especially US) and a weaker dollar should help offset fracking’s impact. IMHO, of course.
Yes, it will come back very strong. Exxon has been building refineries all over the world. In the last two years, they finished up a new facility in Baytown, TX that cost about $15 billion. Exxon-Baytown has one of the largest refinery complexes in the world. This new unit is only a very small part of the complex. If I had a bunch of money laying around, I'd be very tempted to put some of it into Exxon stock.
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.
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Very level headed, reasoning...thank you
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