We’re far removed from the energy-market crisis that severely impacted the U.S. in the middle part of this decade. Nevertheless, the stocks of big oil firms like Exxon Mobil (NYSE:XOM) have never quite looked convincing since the end of that era.
Yet XOM stock has gained nearly 20% since the beginning of January.
Regardless of where oil prices stand, this sector will always attract buyers. While we’re shifting rapidly toward alternative fuels and automated technologies, traditional transportation platforms will remain relevant for some time. Plus, major oil companies tend to pay generous dividends, and XOM stock is no exception.
At the same time, investors have good reason to hesitate before buying Exxon Mobil stock. In the first two months of this year, XOM stock jumped nearly 19%. But since the beginning of March, XOM has only inched forward about 1%. The shares of its competitors, including Chevron (NYSE:CVX) and Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B), have performed similarly.
How should investors approach Exxon Mobil stock now? Let’s take a look at its pros and cons, and come up with a reasonable course of action.
XOM Stock Receives a Political Green Light
No matter what your view of Exxon Mobil stock, we can all agree on one thing: the underlying company doesn’t have the greatest image, especially among millennials and the emergent Generation Z.
Young Americans don’t care for big corporations. Well,they don’t get any bigger than XOM. Plus, millennials have placed lesser importance on attaining vehicles than prior generations, invariably hurting the longer-term.outlook of XOM stock.
In this environment, you’d expect government regulators to put the screws on the oil firm. Instead, they gave them the green light to do what XOM does best: mine “black gold” by whatever means possible.
Earlier this month, the Securities and Exchange Commission supported Exxon’s bid to block a politically-charged shareholder resolution. A well-heeled investor group – which included New York State’s pension fund – proposed that Exxon abide by the terms of the Paris climate accord.
However, XOM argued that the advocacy group was trying to “micromanage” the organization, cutting into its core operations. XOM’s victory was definitely positive for the owners of XOM stock.
As InvestorPlace’s James Brumley noted last month, Exxon’s fortunes now depend on the Permian Basin. With estimates for the output potential of the region rising, XOM has invested aggressively in the fossil-fuel-rich region.
The last thing you’d want if you’re bullish on Exxon Mobil stock is for an advocacy group to derail years of research, exploration, and development dollars. After this SEC-backed win, XOM can focus on substantive challenges.
Profitability Concerns Weigh on XOM Stock
However, growth and profitability concerns have left prospective buyers of XOM stock on the sidelines, unwilling to take a large risk.
The main bull thesis on Exxon Mobil stock is that the Permian Basin can spark an American oil renaissance. If that occurs, our country would progress from merely being energy independent to becoming a major oil exporter. If current production estimates are correct, we could have a new Saudi Arabia in our backyard.
Of course, if those estimates are wrong, XOM would have some explaining to do. But many investors aren’t waiting around for such a scenario to materialize. XOM’s aggressive spending today might result in strong gains by XOM stock tomorrow. But unfortunately, there’s a very real possibility that buyers of Exxon Mobil stock may end up holding an expensive bag.
Let’s not forget that the oil market is often full of surprises, and usually not the pleasant kind. For instance, a series of fires in refineries last month negatively impacted capacity in Texas and California. Such incidents place more pressure on the earnings and profitability of oil companies.
This is exactly what the owners of Exxon Mobil stock did not want to see.
How to Approach XOM Stock
Given the relatively equal weight between pros and cons, I’d like to take a broader view of XOM. Specifically, both domestic and international oil indices, while still steadily moving higher, have climbed more slowly over the past two months.
Another point is that Wall Street is fearful that an economic slowdown will materialize. Indeed, the Dow Jones has largely gone sideways since late February. Therefore, it’s not a great idea to chase XOM stock, which depends on a robust economy. Plus, the impact from the refinery fires may hurt Exxon’s first-quarter results.
Don’t get me wrong, though. I think the long-term outlook of XOM stock is positive, and it’s a great dividend play. However, I anticipate some turbulence ahead for Exxon Mobil stock. Let the dust settle before buying XOM.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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