Investors in Exxon Mobil (NYSE:XOM) stock have had a strong 2021 so far.
XOM stock is up over 33% year-to-date (YTD) and 40% over the past year. Yet regular InvestorPlace.com readers are familiar how challenging 2020 was for many oil names like Exxon.
In the initial months of the pandemic, cash flows struggled. Exxon faced sluggish demand and lower commodity prices.
The stagnant oil market led to the removal of XOM stock from the Dow Jones Industrial Average (DJIA), but developments in 2021 have meant an improvement in our economy. Now, the demand for oil and natural gas are higher. As a result, XOM stock has had a strong run-up in price and trades shy of $55.
Global oil demand is expected to continue soaring in the coming decade. The International Energy Agency (IEA) estimates it to go up to 104.1 million barrels per day in 2026, up from about 96.5 million barrels this year.
Driven by demand for plastics, petrochemicals will account for 60% of the oil demand growth in the coming decade. At $70/barrel or more, oil majors like Exxon can generate massive amounts of cash flow.
While oil and natural gas prices have recently surged, fossil fuels face intense competition from the rapid expansion of alternative energy sources.
Renewable energy worldwide production is soaring, which is expected to displace natural gas over time. Electrical vehicle (EV) production is also booming, which will hit oil demand in the long term.
Therefore, investors in XOM stock will need to pay attention to industry developments in the months ahead. However, for now, its dividend yield of 6.3% is too good to pass. Let’s take a closer look.
How Recent Quarterly Results Came
Exxon released robust second-quarter results on July 30. Net income of $4.7 billion translated into $1.1 per diluted share. A year ago, net loss had been $1.1 billion.
The $5.8 billion increase in earnings was fueled by oil and natural gas demand as well as quarterly chemical and lubricants contributions. Analysts estimate that Exxon will earn $4.29 per share for 2021 and $4.76 per share for 2022.
Cash flow from operating activities came in at $9.7 billion. The cash was used to fund dividend payments, capital investments and debt reduction. In fact, Exxon has cut down its debt by $7 billion during 2021. In addition, its cost-cutting efforts have saved it $4 billion in structural expenses over the last 18 months.
“In our efforts to support society’s energy transition goals, our Low Carbon Solutions business made progress in identifying new opportunities and in establishing new partnerships in carbon capture and storage, hydrogen and low-emission fuels,” said CEO Darren Woods on the results.
The emphasis on alternative energy is important given how investors have put their faith in green energy stocks in the past year. For instance, the Invesco WilderHill Clean Energy ETF (NYSEARCA:PBW), the iShares Global Clean Energy ETF (NASDAQ:ICLN) and the SPDR S&P 500 Fossil Fuel Reserves Free ETF (NYSEARCA:SPYX) are up over 52%, 45%, and 32%, respectively in the past 52 weeks.
Alternative Energy Gaining Traction
Clean energy is on track to increase in importance over the next several years. The International Energy Agency (IEA) declared that growth in oil demand is likely to cease by 2030. Yet, IEA also added, “In the absence of a larger shift in policies, it is still too early to foresee a rapid decline in oil demand.”
So, oil is far from dead, and thus is most likely to continue powering the global economy during the next decade. Oil demand is particularly expected to surge in developing markets, and oil remains a key commodity in the chemicals industry. Therefore, investors in oil companies are faced with a long-term versus short-term dilemma.
The oil industry’s future depends primarily on the shift toward green energy alternatives. If we see a slow transition, XOM stock is primed to be a cash cow for many years. However, investors need to pay attention to long-term headwinds that the oil industry faces.
More and more countries are encouraging the use of electricity or other renewables in areas such as transportation currently dominated by oil. Therefore, the steps Exxon’s management will take to participate in the transition to alternative energy sources will likely determine how investors regard the growth potential of XOM shares.
The Bottom Line on XOM Stock
Exxon Mobil has generated consistent dividend income for millions of investors over the years. Thus, XOM stock still has many fans.
The stock currently trades 10.80 times forward earnings and 1.07 times current sales. It is an attractive valuation if the company can sustainably grow its earnings. Needless to say, its generous 6.3% dividend yield should continue to attract income-oriented investors.
On the other hand, Exxon may not be able to return to its previous earnings growth during a period when the entire world is focused on climate change, renewable energy, carbon emissions and EVs. Therefore, there is a real risk that XOM could underperform the broader market in the future.
However, if management can decrease the importance of oil and gas on revenues and start including alternative energy revenue sources, then it could be a different story. If you are looking for dividends, then XOM should be on your shopping list. But pay attention to how the market for green energy develops and affects Exxon Mobil.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.