Yehuda Waitman
Years after the coronavirus pandemic has faded into distant memory, when masks and social distancing will seem like foreign concepts, one aspect of the unique times we find ourselves in will surely be continuously studied and analyzed — especially, the pandemic’s effect on our financial markets. Markets tumbled as the pandemic was unfolding, with some indices losing 40-50% value in a matter of weeks — an already gloomy situation was made even gloomier. Yet, something remarkable happened over the course of the next few months: financial markets skyrocketed, with the biggest indices — including the Dow Jones Industrial Average, S&P 500, NASDAQ — reaching new highs amid soaring hospitalizations and battered economies. Despite the fact that the markets are showing clear signs of investor optimism, not all firms have been lucky enough to hop on the “rollercoaster” ride back to the top, thereby opening up opportunities to capitalize on mispricings — incorrectly priced shares. Many of these mispricings have since dried up as investors took notice, but some opportunities remain, and perhaps none more notable than Exxon Mobil. But by the time you’re reading this article, you may have already missed it.
Exxon Mobil, the global energy behemoth and descendant of John Rockfeller’s Standard Oil, is no stranger to wild swings in the markets. Unlike firms such as Facebook or Amazon, whose successes are largely dependent on their abilities to develop money making products and fend off competition, Exxon wields much less power in determining its own success. Selling prices of Exxon’s products — mostly crude oil, natural gas, and other forms of energy — are determined by trading on the markets several months ahead of delivery date. For Exxon, even if it achieves supreme supply chain efficiency and has superior products than rivals, its profits are capped by prices in the markets. Whether for the good or the bad, at the end of the day Exxon does not truly control how much money it makes from selling its products. For the past several years Exxon has poured billions of dollars into new investments hoping they would pay off several years down the line, thereby limiting short-term cash maneuverability. Finding itself already cash-strapped in the short term prior to the pandemic, Exxon got hit with an uppercut to the face by the freefall in oil prices brought about by the pandemic. Exxon has quickly found itself in the “red” for consecutive quarters for the first-time ever. The firm’s shares have taken a beating, falling from roughly $70 in January, hitting a low of $30 in March, and settling at $43 as of December 13.
Clearly, unlike many high-flying technology stocks, Exxon has been left out of the markets run to the top, and for largely good reason. The company is facing a severe financial crisis unlike it has ever seen before, leaving some wondering if it will ever be able to truly recover. Making matters worse, the company recently wrote down the value of its natural gas assets to the tune of $20 billion, has announced layoffs for 15% of its global workforce, and was forced to borrow money to make recent payments. With all this in mind, many investors were puzzled when Exxon’s executives recently reiterated their commitment to maintaining its quarterly dividend amount in the coming year. Investors and analysts alike quickly got to work calculating exactly how Exxon might be able to follow through with that promise, and the results were not pretty. Some have forecasted a shortfall for 2021 of up to $48 billion, and declared that Exxon might be forced to cut its dividend for the first time in decades. With the above in mind, you might be wondering: “Where’s the mispricing opportunity here? It seems justified! Perhaps overvalued!” However, just a quick look at the news and numbers shows that things are just a bit brighter than they seem.
Many analysts have underappreciated the fact that oil prices could in fact rise significantly in the coming months. The March/April drop in oil prices was driven by two main factors: overall market uncertainty and the evaporation of global demand. The first factor has been overcome, and while the second still largely remains true, the situation is quickly improving as the Pfizer vaccine rolls out. Even without vaccine developments, people across the globe have returned considerably to airports and are taking road trips again. On top of this, Crude Oil prices have risen 40% in the past six weeks, following output decisions by some of the largest oil producing nations worldwide. Seeing as Exxon’s profits are much more heavily tied to the markets than many other firms, if oil prices do in fact continue to rise as many forecast, Exxon’s bottom line will continue to improve. While this is only part of the profit equation, Exxon has announced plans to cut operational costs to the tune of Billions (beyond just the job eliminations), and has scaled back on its plans to pour money into its long-term investments. In short, with the vaccine rollout expected to continue worldwide, many experts are now predicting a further rise in oil prices, and with Exxon’s efforts to save Billions in costs the future of Exxon appears to be far brighter than meets the eye. The root of Exxon’s existential crisis from the spring is well on its way to being eradicated.
Finally, let us consider all this information in light of Exxon’s stock price. At the start of November, Exxon’s stock was trading at $32 a share, with a roughly $3.50 annual dividend. This amounted to a dividend yield of over 10%. Depending on the day, this number represented the first or second highest dividend yield in the entire S&P 500. For a company with a 150 year history, nearly $250 billion dollars in revenue, assets across the world, and decades of consistent dividend payments, this was rather remarkable. When oil prices began to rise in November, investors began to view Exxon’s problems as formidable but not insurmountable. Exxon’s stock price has trended significantly upwards, sitting at $43 as of December 13, representing a 40% gain (notice the correlation with oil prices). By now, you might be feeling some regret having missed out on the 10% dividend yield which was available just six short weeks ago. Realize, however, that despite the rise in Exxon’s stock, its current price still offers an impressive 8% dividend yield, still good for one of the highest in the S&P 500. While you may have missed the 10% dividend yield, you really only partially missed it.
Exxon’s problems certainly seem concerning, and this article was not meant to belittle them in any form. This article is also not coming to argue that Exxon is risk-free, and anyone who chooses to invest is assured to reel in profits — real threats very much do exist. However, despite these threats, when one appreciates that Exxon considers its dividend payments “sacred,”— having increased its annual dividend for 37 consecutive years — and the improving broader economic conditions, maybe, just maybe, Exxon’s juicy 8% dividend yield is too good to turn away.