We live in extremely unusual times. While there have been numerous conflicts across the globe after World War 2, there remains a sense of stability and the creation of wealth. Many long-term investors on Seeking Alpha have tales of very long-term lucrative cash flows generated by the Exxon Mobil (NYSE:XOM) share dividends. There are many “buy and hold investors in the XOM space. Investment in energy has seen its fluctuations and ups, but the streams of cash have flowed. The rapid rise of the super wealthy and the demise of middle-class people has altered the world and what was once thought to be essential necessities such as home ownership becoming impossible for many. Investment in fossil fuels has increased in risk, and has brought extreme challenges during the COVID epidemic, when transportation almost completely stopped. The result for companies like Exxon Mobil was traumatic. Coming out of COVID (although the SARS-CoV-2 virus may not done with us yet) there has been an elation and insistence by Exxon management that the latest problems are an element of the typical cyclical characteristics of the oil and gas industry which they argue arises due to a mismatch between supply (projects take a considerable time to build) as well as demand. Many but not all in the fossil fuel industry (including Exxon management in particular) insist on refusing to acknowledge that things are changing and that we’ve entered the final phase of the fossil fuel extraction. This is occurring due to an increasing need to decarbonize (due to an emergency in climate change) and dramatic advancements and price reductions in the field of renewable power generation. All of these factors indicate that there are significant and irreversible changes afoot. While XOM management is reluctant to acknowledge this, it is essential that investors who are considering investing in the company consider the changing energy landscape and for existing investors to evaluate whether or not their XOM investment is the right location for their money. I’ve written numerous articles on various aspects of investing in XOM. Here , I discuss other aspects that are making me cautious about investment in Exxon Mobil at this time and why I have hesitancies over the Exxon stock forecast 2025.
Buy when there is a sense of despair not exuberance
Stone Fox Capital made the remarkable observation in the past that the analyst community, while favorable or neutral regarding XOM (5 strong buy 5 buy, 4 buy 17 hold, just one sell out of 27 analysts over the past 90 days) but is having difficulty setting price targets higher than the current price. The point is that while XOM is near its all-time high share price, there is an overall sense of caution and even malaise even inside the organization. If the market were this good, it would be a time for an optimistic outlook. Instead management is building its cash (to 20 or 30 billion ) and is even saying that the good times might end) and is implementing plans to sell shares for $30 billion in the buyback program scheduled for 2022-2023. As a result, the business seems to be proceeding slow in this program. why buy back shares at such high prices?
Based on the above, I’m trying for ideas of why I should purchase XOM immediately.
Exxon Mobil and Australian natural gas prices
The Russian invasion has created turmoil in gas market around the globe, and the consequences are felt everywhere. In Australia we can see the impact of a regulated the gas and oil industries on domestic natural gas prices. Unlike Norway that has a monopoly on exploitation of its fossil fuel resources and in turn has the world’s largest money-management system, Australia has largely submitted to the demands of the fossil fuel companies. This can be seen in the current crisis in East coast Australian natural gas pricing, which is affixed on the global gas prices. The impact of this can be seen when the cost of gas from Western Australia is considered. It is estimated that in Eastern Australia natural gas prices have increased from $A6-12/Gigajoule in about the start of the year 2022 up to $A50/Gigajoule by May. This translates to electricity prices of approximately $300/MWh.
Western Australian natural gas prices have not risen. This is due in part to the an unusual political reaction against the natural gas industry and Exxon seems to have been a significant player in how the reserve allocation to the domestic market was carved out in Western Australia. The narrative goes that there was an Exxon Mobil delegation was uncompromising on the issue of no local allocation, but that the gas supply must be available for export through West Australian gas projects. According to the story, the Premier of WA stated “no bargain” in response to the request. Exxon Mobil left with no deal, only to return soon after agreeing that a state carve out for natural gas supplies can be accommodated.
It’s true that the East coast Australian tale of being exploited isn’t unique There is the same story within Guyana and Guyana, where the Guyanese Government has suffered to sophisticated and tough XOM negotiations in various ways. The tale is depressingly similar of a major corporation that has monopolized the negotiations to unfairly favour it.
I’m not convinced that this unbalanced negotiating position is sustainable in the future. Another reason to be wary about XOM’s future.
Natural gas and climate goals exploitation
At the heart of XOM’s business plan is the rapid expansion of oil and gas production. This does not consider the necessity to lower carbon emissions throughout the world. Governments (195 of them committed to achieving Paris Agreement climate targets) all over the world are accelerating investment in renewable energy sources. Every new solar PV and wind projects creates competition for coal and gas-generated power. The issue isn’t a technical one however, it is a political one. In a nutshell the fossil fuel industry is now publicly lobbying for actions to counteract the huge shift towards renewable energy. It’s a major topic of discussion across the globe, even as the Russian invasion brings the fossil fuel industry in Europe to a halt.
I’ve been looking at the latest information on climate and the need to decarbonize in a previous article. My opinion is that the threat of the supply of fossil fuels and price variability is a major issue everywhere, in Europe, Asia and the Americas. Exxon Mobil’s assertion that its products cannot be replaced is under question in light of renewable energy being viewed as a possible solution. A major shift towards investing in renewable energy is a warning indication for the company’s business.
Electrification of transport
Below, I’ve highlighted issues with the model for business of XOM built on expanding natural gas generation. What’s the outlook for oil? Transport consumes ~45% of the oil production, meaning there’s a possibility to drastically reduce carbon emissions through electrification of transport. In the BP’s (BP) the 2017 energy outlook,, it was projected that the adoption rate of electric vehicles by 2035 will be 6%. In 2021, massive electrification in personal transport is taking place. For Norway eighty percent of new cars sold were electric in 2021. Similar numbers for Iceland (72 percent), Sweden (43%) and Netherlands (30 percent) are stunning, while there was a huge increase in China in 2021 16 percent of the domestic new car sale were electric. The key driver for the sales of electric vehicles is recognition of the need to reduce CO2 emissions.
The CAGR of electric vehicle sales between 2016 to 2021 was 61% in Europe as well as 58% in China and 32 percent within the US. The number of electric cars will be five times the number of electric car models in 2021 as compared to 2015.
It takes time for electrification of transportation to make the desired impact. However, it’s rapidly approaching. Of the top manufacturers, only Toyota (TM) is looking to keep producing long-term an internal combustion engine. I see no evidence that Exxon Mobil management accepts what is becoming clear. There will be an impact on oil consumption soon. The big question for me is when and how will end the disbanding of the traditional ICE (Internal Combustion Engine) fleet be tackled?
Conclusion
In this article, I’ve addressed a number of questions that deserve investor attention in making a decision regarding investment in XOM in the present. There is a mix of both short and longer term issues that are relevant now. In the long-term, I suggest that XOM’s licence to operate is under scrutiny in a way that previously , the company has been capable of avoiding.
The most important issue is pricing for energy and the impact of renewable energy projects in transforming the metrics to favor energy production that is managed locally rather than via far-flung or politically insecure (e.g. Russia) sources. This is the perfect moment to think about the shifting energy landscape, and also think about other opportunities for investment. The solar PV and wind (especially offshore) are emerging as where the massive investment opportunities are opening. Why invest in an industry that is destined for closure? Sure, there’s money to be made in an industry in the process of being shut down however, it’s an investment that is more complex than an industry undergoing huge expansion.
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