Exxon Mobil (XOM) is not an exciting stock, in fact I would go so far as to say that, to many investors, it is boring. The company is so huge and far reaching that it rarely surprises, and the stock’s beta reflects that. “Beta,” for those who aren’t fluent in stock geek Greek, is a measure of to what extent a stock moves with the market; a beta of 1.0 indicates that an individual stock moves with the broader market in perfect unison. A reading under 1 indicates less volatility than stocks in general, while over 1, more. XOM’s 0.89 beta shows a stock that follows the broader market pretty closely, while managing to be significantly more boring.
The company, on the other hand, elicits emotions that are anything but boring. In the polarized rants that pass for commentary in the internet age, Exxon Mobil is a divisive subject. When I have written pieces that are vaguely bullish on the stock I have been accused of being in the pay of big oil, or totally unaware of the evil that the company does every day. Offer up some criticism or skepticism, on the other hand, and I become a clueless tree hugger with some hidden agenda and a faintly treasonous attitude. I am, of course, neither; I am simply a realist.
That realism has led me in the past to see XOM as a stock that almost everybody should own. Whatever happens in the world, it seems, Exxon Mobil continues to grow relentlessly. Global recessions may cause temporary setbacks, but Exxon just marches on; the stock goes up and the company pays a dividend that has grown consistently over the last 31 years. Pursuing growth with a long term view regardless of the economic or political climate is what good companies do.
This weekend, however, saw news that gives even me pause. Exxon Mobil announced that, despite increasing sanctions from Western nations, they have started drilling for oil in the Russian Arctic in a joint venture with Rosneft, the Russian oil company. Let’s be clear, there is nothing illegal about this. The sanctions aren’t designed to halt economic cooperation between Western and Russian companies, but beginning drilling on Saturday demonstrates a breathtaking arrogance.
I suppose the good news is that Exxon Mobil, who has vast experience of operating in unstable environments, appears confident that this is a temporary situation with little or no long term consequences. I just cannot escape the conclusion, though, that this time they may be making too much of an assumption that they are immune from consequences themselves.
We have right now in the U.S. a President who is coming under fire in two areas. Polls show that President Obama is not perceived as a strong leader, nor is he seen as having an effective foreign policy. For a Democrat, this produces a dilemma; how do you look strong, particularly on foreign policy, without alienating your base? It is quite possible that in some way punishing a private corporation for “aiding the enemy” is an appealing course of action, particularly when much of that base already sees said corporation as a bogeyman anyway. We also have a congress that is hurtling toward an election with rock bottom approval numbers. A little bipartisan corporation bashing may seem attractive to all sides in Washington.
In general, I try not to let my feelings about corporate actions influence how I feel about that company’s stock. How I personally perceive Exxon Mobil’s decision to press ahead with drilling in Russia is irrelevant. What matters here is what effect I see it having on the stock, and it is hard to conclude that it will be anything other than negative, at least in the coming weeks and months. They are not the only company continuing operations in Russia, but that is not particularly relevant either. They are a high profile easy target and have pressed ahead with drilling as the U.S. and European governments are attempting to exert economic pressure on Putin and his regime. That may be a mistake, and Putin’s public praise of that decision certainly won’t help.
The company is likely to encounter an increasingly hostile regulatory and political environment, and the cumulative effect of that will be to hold the stock back. That, rather than any moral indignation, is the reason I would look to sell XOM at these levels.