What is there to say about oil companies that hasn’t been said yet? All of Wall Street agrees that investing in oil stocks like Exxon Mobil (NYSE:XOM) is dumb. That alone is invitation for me to consider XOM stock from the bullish side. When everyone is on the same side of the boat, it’s time to try the other side.
We all know the arguments against the use of crude oil. The world has been hating on fossil fuels in light of climate change, so there is renewed interest in ESG investing. XOM stock would be the exact opposite of that. Today we will argue why it’s actually an investment opportunity.
Oil Demand Is Waning but Far from Dead
I agree that we have to wean ourselves off of using up the planet’s resources just to power it. But I also know that this shift will take decades to even make a dent in demand.
The electric vehicle, for example, is not going to replace the internal combustion engine anytime soon. The trend is ongoing but it’s still in its infancy stage. Electric cars have been around since the 1880s, but until Tesla (NASDAQ:TSLA) all other ventures failed. This is the first car maker to succeed in convincing the masses that it’s doable.
Amazingly in 2019 Tesla delivered 370,000 vehicles. But to keep things in perspective, last year the world produced 98 million motor vehicles. In the United States alone the yearly sales rate is almost 20 million cars and trucks.
There’s a definite uptrend in alternative energy but it is still a budding movement. It will be years before the math starts to flip to the point where it kills oil companies. It is way too early to declare Chevron (NYSE:CVX) and XOM stock dead. By that logic, cigarette companies would no longer exist. The CDC reports that cigarette smoking kills almost half a million people a year. That’s about one out of every five deaths in the U.S., yet their companies survive and their stocks are still on the Wall Street boards.
Look at XOM Stock From a New Light
While the death of its stock is not imminent, the thesis changes for Exxon. This is no longer an upside growth story, at least not for a long while. Because the price of oil fell so far, industry companies have to tighten their spending belts. They already drastically cut their capex, so they stopped pursuing new ventures until this test elapses. This is how they can stay true to their promise to uphold the dividend.
And therein lies the thesis. XOM stock is an easy way to earn interest on capital with relatively limited risk.
Banks no longer offer investors any meaningful yield, nor do U.S. bonds. The central banks’ loose money policies made sure of that. Overseas it may even cost you money to deposit it, or to lend it out to governments.
These inflationary policies force investors to seek yield from riskier assets like stocks. Fixed income has to come from somewhere and XOM stock fits the bill. It currently pays a whopping 10% a year. That’s 20 times more than you can get most anywhere else.
It is an attractive proposition especially that the price has already fallen so far. It remains 50% below 2019 levels. After such a sharp correction, the price contains very little froth if at all. Further downside from here will need incrementally bad news. I wrote about this concept in early September and the trade held up OK. Sure, the price fell, but that was during a very sharp market-wide correction. The point is that it found footing and held the pandemic lows.
There shouldn’t be much extrinsic risk either. The oil industry is already in shambles so all the cuts and bruises are showing already. Investors have already priced in what surprises they can imagine.
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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