We live in very unusual times. There have been a variety of conflicts across the globe in the years since World War 2, there remains a sense of stability and the creation of wealth. Many investors who invest for the long term on Seeking Alpha have tales of extremely long-term cash flow profits generated by their Exxon Mobil (NYSE:XOM) share dividends. There are many “buy and hold” investors in the XOM market. Energy investments have had their bumps and valleys, but the cash rivers have flowed. The rapid rise of the super rich and the decline of the middle class have altered the world as what used to be essential items like owning a home becoming unapproachable for many. Fossil fuel investments have become more fraught, with severe challenges during the COVID disease, where transport nearly ended. Companies like Exxon Mobil was traumatic. As COVID has been cured (although SARS-CoV-2 is not yet over) there has been feeling of relief and the insistence of Exxon management that the current difficulties are all related to the typical cyclical nature of the fossil fuel industry that they claim is due to the inconsistency between supply (projects require a lengthy time to get underway) and demand. The majority, but not all, of the sector of fossil fuels (including Exxon management in particular), are adamant in refusing to accept that the world is changing and we’ve reached the end of the use of fossil fuels. This is occurring due to convergence of a need to reduce carbon emissions (due to the climate crisis) as well as dramatic advancements and cost reductions in renewable power generation. All of these factors indicate that there are significant and irreparable changes in the pipeline. Although XOM management is reluctant to admit this, it’s important for new investors to consider the changing energy landscape and for existing investors to reconsider whether the XOM investments are the best option for their investment funds. I’ve written many articles on various aspects of investing in XOM. Here I consider further concerns that make me cautious when investing with Exxon Mobil at this time.
Purchase when there is despair not joy
Stone Fox Capital made the intriguing observation recently that the analyst community, while positively or neutral on XOM (5 solid buy 4, 4 buys, 17 hold and just 1 sell of 27 analysts over the past 90 days) however, has difficulty designating price targets above the current price. The point is that while XOM is within reach of its all-time high share price, there’s general skepticism and even anxiety at the top of the business. If the economy were so good, this could be the perfect time to have an optimistic outlook. Instead management is increasing its cash (to the tune of $20-$30 billion ) and is even saying that the good times might be over) and has an offer of $30 billion for share buyback program scheduled for 2022-2023. The company appears to be moving slow with this plan; why would they want to buy back shares at such high prices?
In light of the above, I am struggling to think of reasons to buy XOM now.
Exxon Mobil and Australian natural gas price
The Russian invasion has caused chaos in the gas markets across the globe and its effects are felt across the globe. In Australia we can see the impact of a tightly controlled oil and gas industry on the prices of natural gas in the country. Contrary to Norway that has a monopoly on the extraction of fossil fuel reserves and consequently has the world’s biggest sovereign wealth fund, Australia mostly has given in to demands from the fossil fuel companies. This can be seen in the current crisis with East coast Australian natural gas pricing, which is tied with the gas market in the world. The dramatic impact of this is seen when the cost for natural gas within Western Australia is considered. In Eastern Australia natural gas prices are up from $A6-12/Gigajoule starting of 2022 and then $50/Gigajoule as of May. This translates to electricity prices of approximately $300/MWh.
Did you Know? Top Graphs carry the Exxon stock forecast 2025.
Western Australian natural gas prices haven’t risen. This results from an unusual political reaction against the natural gas industry, and Exxon seems to have been an active participant in the process of how the reserve allocation for domestic use was divided within Western Australia. The tale goes that there was an Exxon Mobil delegation was uncompromising about not having a local allocation, but that all gas must be exported through West Australian gas projects. The claim is that The Premier in WA stated “no bargain” as Exxon Mobil left with no agreement, only to return soon after agreeing that a state-wide carve out for natural gas supply can be accommodated.
The East coast Australian tale of being exploited isn’t unique however there is an identical story of exploitation in Guyana where the Guyanese government has been unable to stand up to the complex and arduous XOM negotiations in a variety of ways. This story is depressingly typical of a large corporation controlling the negotiations to unfairly favor it.
I’m not convinced that this skewed negotiating strategy is sustainable in the future. This is another reason to be wary regarding the future of XOM.
Natural gas and climate targets extraction
At the heart of XOM’s business planning is the massive expansion of the production of oil and natural gas. This is ignoring the necessity to lower carbon emissions throughout the world. Governments (195 of whom are committed to meeting Paris Agreement climate targets) across the globe are aggressively increasing investment in renewable energy sources. Every new solar PV and wind-powered project creates competition for natural gas and coal-generated power. The problem is no longer an issue of technology however, it is a political one. In short, the fossil fuel industry has been publicly pushing for action to stop the massive shift towards renewable energy. This is now a huge issue in the world, even during the Russian invasion of Ukraine brings the fossil fuel industry in Europe to a halt.
I’ve looked at recent information on climate and the need to decarbonize in a previous article. My conclusion is that the risks of the supply of fossil fuels and price fluctuations are a major issue across Europe, Asia and the Americas. Exxon Mobil’s assertion that its products are incomparable is now in doubt as renewable energy is seen as a solution. The massive shift in investment in renewable energy is a cautionary indicator for the business of Exxon.
Electricity of transport
Above , I’ve discussed some challenges to an XOM business model. XOM built on expanding natural gas extraction. What is the future of oil? Transport consumes ~45% of the oil that is produced, therefore there’s an opportunity to reduce emissions dramatically through the electrification of transportation. In the BP’s (BP) 2017 annual energy outlook it was projected that the adoption rate of electric vehicles by 2035 would be around 6 percent. Fast forward to 2021 and massive electrification of personal transport is taking place. It is estimated that in Norway eighty percent of all new car sales were electric in 2021. Comparable numbers for Iceland (72 percent), Sweden (43%) and Netherlands (30 percent) are awe-inspiring, and the figures for China in 2021, 16% of domestic new car sale were electric. The most important driver for electric vehicle sales is recognition of the necessity to cut down on CO2 emissions.
The CAGR of electric vehicle sales between 2016 until 2021 was 61 percent in Europe as well as 58% in China and 32 percent across the US. The number of electric cars will be five times the number of electric car models in 2021 compared with 2015.
It takes time for electrification of transport to make the desired impact. However, it is moving fast. Of the main manufacturers, there is only Toyota (TM) is seeking to maintain production for the long term of the internal combustion engine. I haven’t seen any evidence to suggest that Exxon Mobil management accepts what is now becoming apparent. There will be an impact on consumption of oil soon. My main concern is how and when will end the disbanding of the traditional ICE (Internal Combustion Engine) fleet be addressed?
Conclusion
In this article I’ve covered a range of issues that deserve investor attention in coming to a decision about the investment of XOM right now. There’s a mixture of both short and longer term questions that are pertinent now. In the long run, I would suggest that XOM’s license to operate is under scrutiny in a manner previously the company has been capable of avoiding.
The bigger issue concerns the energy price and the role of renewable energy projects in changing the metrics to favor energy production that is controlled locally, rather than through distant or politically unstable (e.g. Russia) sources. It is now a great time to look back at the shifting energy landscape, and also think about other investments. Clearly solar PV as well as wind (especially offshore) are beginning to be seen as investment opportunities that are huge. possibilities are opening up. Why invest in an area that is on the verge of closing? There is certainly the potential to earn money in an industry that is in the process of closing however it’s a more complicated investment opportunity than an industry in massive expansion.