Our world is in some very peculiar times. While there have been numerous conflicts around the world since World War 2, there has nevertheless been a sense of stability and wealth creation. Many investors who invest for the long term on Seeking Alpha have tales of very long-term lucrative cash flows generated by their Exxon Mobil (NYSE:XOM) share dividends. There are lots of “buy and hold” investors in the XOM market. The energy sector has experienced its ups and downs, but the streams of cash have flowed. The dramatic emergence of the super wealthy and the demise of the middle class has changed the face of the market in a way, with what used be essential necessities like home ownership now becoming inaccessible for a lot of. The fossil fuel investment has become more fraught, with severe challenges during the COVID epidemic, when transportation almost ended. Companies like Exxon Mobil was traumatic. As COVID has been cured (although SARS-CoV-2’s virus is not yet over) there’s been a sense of relief and insistance by Exxon management that the current issues are related to the typical cyclical characteristic of the fossil fuel industry, which they believe is due to mismatch of supply (projects require a lengthy time to develop) or demand. The majority, but not all, of this industry (including Exxon management in particular), are adamant in refusing to accept that the world is changing and that we’ve entered the end of the use of fossil fuels. This is due to the convergence of a desire to reduce carbon emissions (due to the current climate crisis) as well as dramatic advancements and price reductions in renewable power generation. All of these factors indicate that there are huge and irreparable changes in the pipeline. While XOM management isn’t willing to acknowledge this, it’s vital that investors take into consideration the shifting energy landscape and also for existing investors to reconsider whether their XOM portfolio is really the right option for their investment funds. I’ve written numerous articles about different aspects of investment in XOM. In this article, I will discuss additional concerns that have made me cautious when investing within Exxon Mobil at this time.
Purchase when there is despair not excitement
Stone Fox Capital made the interesting observation recently that the analyst community, while neutral or positive about XOM (5 solid buy 5 buy, 4 buy 17 hold, and one sell out of 27 analysts over the past 90 days) however, has difficulty setting price goals that go beyond the current price. The point is that while XOM is near its record-setting share price, there’s general skepticism and even a sense of malaise within the company. If the market were so good, this would be a time for an optimistic outlook. Instead management is increasing its cash (to the tune of $20-$30 billion, and even admitting that the current good times might be over) and is implementing 30 billion shares to buy back under the program for 2022 and 2023. It’s not surprising that the company is moving slow with this plan; why should it buy back shares at such a high price?
In light of the above, I am struggling for ideas of why I should purchase XOM today.
Exxon Mobil and Australian natural gas price
The Russian invasion has caused confusion in gas market around the world and the consequences are felt all over the world. In Australia one sees the effects of a tightly controlled gas and oil industry on the prices of natural gas in the country. Contrary to Norway, which has controlled the extraction of its fossil fuel assets and consequently has the largest sovereign wealth fund, Australia mostly has given in to demands from fossil fuel companies. This can be seen in the current crisis in East coast Australian natural gas pricing, which is pegged on the global gas prices. The impact of this can be seen when the cost for natural gas within Western Australia is considered. In Eastern Australia natural gas prices have risen from $A6-12/Gigajoule at starting of 2022, to $A50/Gigajoule in May. That translates into electricity prices that are averaging $300/MWh.
Western Australian natural gas prices have not risen. This is due to very rare political resistance to the natural gas industry as well as Exxon appears to have been a significant player in how the reserve allocation of the domestic market was divided to Western Australia. According to the story, an Exxon Mobil delegation was uncompromising about having no local allocation, but that all gas needed to be exported through West Australian gas projects. The claim is that the Premier of WA said “no bargain” and Exxon Mobil left with no agreement, but returned shortly after having agreed that a state carve out for natural gas supply could be accommodated.
This East coast Australian tale of being exploited isn’t uncommon; there is a similar story that is happening in Guyana with the Guyanese Government has suffered to sophisticated and tough XOM negotiations in different ways. This story is depressingly typical of a major corporation that has monopolized the negotiations to unfairly favour it.
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I’m not convinced that this unbalanced negotiation position will last in the near future. This is yet another reason to be cautious about XOM’s future.
Natural gas and climate goals exploitation
At the heart of XOM’s business plan is the dramatic growth of the production of oil and natural gas. This ignores the need to reduce carbon emissions in the world economy. Governments (195 of them are committed to achieving Paris Agreement climate targets) all over the world are increasing their investment in renewable energy sources. Each new solar PV or wind power project is a threat to fossil fuels and gas-generated electricity. The issue is not an issue of technical nature however, it is a political one. In a nutshell the fossil fuel industry is now out in the open lobbying for actions to counteract a massive shift to renewable energy. This is now a huge talking point globally even in the midst of the Russian invasion of Ukraine brings the fossil fuel industry in Europe to the brink.
I’ve explored recent information on climate and the need to reduce carbon emissions in a recent article. My take is that the threat of fossil fuel supply and price volatility is a significant problem across Europe, Asia and the Americas. Exxon Mobil’s claims that its products are unalterable is in question as renewable energy is seen as a way to solve the problem. A major shift towards investing in renewable energy is an alarm indication for the company’s business.
Electricity of transport
Above I’ve indicated issues with this business plan of XOM built on expanding the production of natural gas. What about the future for oil? Transport consumes around 45% of the oil that is produced, therefore there’s an opportunity to drastically reduce carbon emissions by electrifying transportation. In BP’s (BP) year-end energy projections for 2017 it was projected that the adoption rate of electric vehicles by 2035 will be 6%. Now, fast forward to 2021 and massive electrification in personal transport is happening. The statistics for Norway eighty percent of all new cars sold were electric in 2021. Similar figures for Iceland (72 percent), Sweden (43%) and Netherlands (30 percent) are staggering, and there was a huge increase in China in 2021, 16 percent of the domestic new car sold were powered by electric. The key driver for electric vehicle sales is the recognition of the need to cut CO2 emissions.
The CAGR for electric vehicle sales between 2016 to 2021 was 61% in Europe, 58% across China and 32% within the US. There are 5 times more electric vehicles by 2021, compared to 2015.
It takes time for electricization of transportation to have some impact but it is becoming more rapid. Of the major manufacturers only Toyota (TM) is attempting to maintain production for the long term of an internal combustion engine. There is no evidence to suggest that Exxon Mobil management accepts what is becoming clear. There will be an impact on consumption of oil soon. The main question I have is when and how will getting rid of the older ICE (Internal Combustion Engine) fleet be dealt with?
In this article I’ve covered a range of issues that should be considered by investors when making a decision regarding the investment of XOM currently. There’s a mixture of both short and long term issues that are important today. In the long-term, I suggest that XOM’s licence to operate is under scrutiny in a way previously , the company was not able to avoid.
The most important issue is pricing for energy and the impact of renewable energy projects in transforming the metrics that favor energy production controlled locally, rather than through distant or politically unstable (e.g. Russia) sources. Now is a good time to look back at the shifting energy landscape, and think about alternative opportunities for investment. It is clear that solar PV and even wind (especially offshore) are coming into focus as the major investment possibilities are being opened. Why invest in an area that is on the verge of closing? There is certainly potential for profit in an industry in the process of being shut down, but it is a more complicated investment opportunity as opposed to an industry experiencing massive expansion.