There was broad weakness in the stock market on Tuesday, which fell about 3%. The energy sector was also under pressure for its own reasons. Exxon Mobil (NYSE:XOM) stock fell 2% but closed off the low of the day. So for a bad day, Exxon Mobil stock fared well enough to warrant some attention.
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This is the spirit of today’s thesis that the worst case scenario will not likely materialize. Exxon Mobil has seen the lows this year already and it makes for a viable trade to hold long term.
The drop on Tuesday in XOM was not specific to it because Chevron (NYSE:CVX) also fell about the same amount. Technically these stocks have been in the hands of the bears for months. I am not oblivious to the fact that they are not likely to be super star stocks any time soon. The resurgence of ESG investing and the onslaught of EVs are major hurdles to the growth in oil demand.
As well, the rekindled green energy movement is making it so that oil stocks are like smoking stocks. If that’s the case then investors should adapt their strategies to suit that new normal.
Quarantine Changed the Exxon Mobil Stock Thesis
The global quarantine caused a change in how much people move. There will be millions of us who will never go back to working the way we did before the pandemic. Telecommuting has finally gotten its teeth into the corporate world. Companies are finding out that they were over-staffed and definitely had too much real estate space. All this means that the destruction in oil demand is not likely to recover to its pre-pandemic levels.
Although the virus breakout was a human tragedy, it had many side benefits that we could not have seen coming. Many industries have seen tremendous improvements in their margins and it’s mostly due to savings from lower overheads and cheaper labor. The advent of technology, especially web-based services like Slack (NYSE:WORK) and Zoom (NASDAQ:ZM), have made it possible for us to remain as productive if not more than we were driving to the office.
The short story is that the investment thesis in oil stocks like XOM stock changed. It is no longer one looking for growth, but rather one buying into fixed income value propositions. This works well in this environment because there is no alternative to earning any yield anywhere else.
The central banks race to zero rates assured this is the case. Getting 8% from a great company like Exxon or Chevron sounds pretty attractive to investors seeking fixed income. The caveat being that management sticks to its promise to uphold the dividend at all costs.
Say Goodbye to $100 Oil
Source: Charts by TradingView
Long gone are the talks of super spike in energy prices and $100 oil. That thesis is dead and buried for a long time if not forever. Something changed this year, Covid-19 forced a hard-reset on all of humanity. Everyone had to reevaluate how they were doing things. Therefore it would be wrong to assume that XOM stock is going to revert to its highs so it’s best to look below for support zones.
We can assume that the March lows will hold in spite of the technical challenges that it has. Exxon stock should find support through $35 per share. There is risk from losing the $40 line but I doubt the bears will be able to do a lot more damage. The bulls will defend it and it’s only a matter of time before it stabilizes once again.
On the way back up investors should temper their enthusiasm. It will find resistance all along the recovery and into prior failures like $44 per share. But then again the point of owning these shares would be to accumulate interest income, not to have capital appreciation. If that comes then that’s gravy, but it should not be the goal.
Considering Synthetic Dividends
Investors should not give up on owning Exxon Mobil stock. They should simply change the expectations to be more in-line with a dividend income strategy. And to guard against more risk from the market-wide correction, investors can create synthetic dividends by selling puts below current price.
For example, I could sell the October $35 put and collect almost $1 for it. If XOM remains above $35 then I would have created 2.6% in synthetic dividends without even owning shares. I can repeat this process as many times as I want. If the price falls below my sold put then I own the shares at $35 and break even at $34 per share.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
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