We live in extremely unusual times. Although there have been many conflicts across the globe in the years since World War 2, there is a feeling of peace and prosperity. A lot of long-term investors are on Seeking Alpha have tales of extremely long-term cash flow profits through the Exxon Mobil (NYSE:XOM) share dividends. There are many “buy and hold” investors in the XOM sector. The energy sector has experienced its fluctuations and ups, but the cash rivers have flowed. The rapid rise of the super-rich and the disappearance of middle-class people have transformed the landscape and what was once thought to be essential necessities such as home ownership becoming impossible for many. The fossil fuel investment has been more risky, with severe challenges during the COVID epidemic, when transportation almost was shut down. The outcome for companies like Exxon Mobil was traumatic. After COVID’s elimination (although SARS-CoV-2 is not yet over) there’s been an elation and insistance by Exxon management that the current problems are part of the normal cyclic character of the fossil fuel industry that they claim is due to a mismatch between supply (projects require a long time to be developed) as well as demand. A lot of people in the industry of fossil fuels (including Exxon management in particular) remain steadfast in refusing to accept that the world is changing and that we’re at the final phase of the fossil fuel extraction. This is due to the convergence of a desire to reduce carbon emissions (due to an emergency in climate change) and dramatic advancements and price reductions in the field of renewable power generation. These two factors mean that there are significant and irreparable changes in the pipeline. Although XOM management isn’t willing to admit this, it’s essential that investors who are considering investing in the company consider the evolving energy landscape, as well as for investors who are already in the market to reconsider whether they believe that their XOM investments are the most suitable location for their money. I’ve written a number of articles about the various aspects of investing in XOM. This article focuses on additional concerns that make me cautious about investing into Exxon Mobil at this time.
For the Exxon stock forecast 2025, head on over to Top Graphs.
Purchase when there is despair not excitement
Stone Fox Capital made the fascinating observation that analysts, despite being generally positive or neutral about XOM (5 solid buy four buys 17 hold, and one sell out of 27 analysts over the last 90 days) however, has difficulty setting price targets that are higher than the current share price. It is important to note that even though XOM is near its record-setting share price, there’s an overall sense of caution and even a sense of malaise inside the organization. If the market were this good, it could be the perfect time to have optimism. Instead management is accumulating its cash reserves (to the tune of $20-$30 billion ) and is even saying that the current good times might be over) and has an offer of $30 billion for share buyback program for 2022 and 2023. It’s not surprising that the company appears to be moving slow with this plan; why would they want to buy back shares at such a high price?
In light of the above, I am struggling to come up with reasons to purchase XOM right now.
Exxon Mobil and Australian natural gas price
The Russian invasion has created confusion in gas market all over the world, and its effects are felt all over the world. In Australia we can see the impact of a controlled gas and oil industry on the prices of natural gas in the country. In contrast to Norway that has a monopoly on the extraction of its fossil fuel resources and consequently is home to the world’s largest government-owned sovereign wealth fund Australia is largely a slave to the fossil fuel producers. This can be seen in the current crisis of East coast Australian natural gas pricing, which is tied on the global gas prices. The impact of this can be seen when the cost for natural gas within Western Australia is considered. The price of natural gas in Eastern Australia natural gas prices have increased from $A6-12/Gigajoule at around the time of beginning 2022 and then $A50/Gigajoule by May. This is equivalent to electricity costs of around $300/MWh.
Western Australian natural gas prices haven’t risen. This is due to a uncommon political opposition against the natural gas industry as well as Exxon appears to have been an important player in the way the reserve allocation for domestic use was allocated within Western Australia. According to the story, the Exxon Mobil delegation was uncompromising regarding the lack of a local allocation, however all gas had to be exported through West Australian gas projects. According to the story, WA’s Premier WA declared “no agreement” as Exxon Mobil left with no agreement, but returned shortly after deciding that a state-wide carve out to supply natural gas could be made.
It’s true that the East coast Australian tale of being abused isn’t atypical There is an identical story of exploitation in Guyana in which the Guyanese government has been unable to stand up to the complex and arduous XOM negotiations in a variety of ways. It’s a sad tale of a major corporation that has monopolized the negotiations, who unfairly favor the government.
I’m not sure that this unbalanced negotiation position will last in the near future. Another reason to be wary regarding the future of XOM.
Natural gas and climate targets extraction
The core of XOM’s business strategy is the rapid expansion of production of oil and gas. This is ignoring the necessity to reduce carbon emissions in the world economy. Governments (195 of them are committed to achieving Paris Agreement climate targets) across the globe are accelerating investment in renewable energy sources. Each new solar PV or wind projects creates competition for natural gas and coal-generated power. The issue is no longer an issue of technical nature however, it is a political one. In short, the fossil fuel industry is publicly advocating for measures to stop the massive shift towards renewable energy. It’s a major topic of discussion across the globe, even in the midst of the Russian invasion of Ukraine brings the supply of fossil fuels in Europe to a halt.
I’ve looked at recent data on climate change and the need to reduce carbon emissions in a recent article. My view is that the risk of the fossil fuel supply and price volatility is a significant problem everywhere, including Europe, Asia and the Americas. Exxon Mobil’s claims that its products are unalterable is in scrutiny since renewable energy is viewed as a possible solution. An enormous shift to investing in renewable energy is a warning signal for the business of Exxon Mobil.
Electricity of transport
Below, I’ve highlighted some challenges to this business plan of XOM that is based on the expansion of the production of natural gas. What is the future of oil? Transport accounts for 45% of the oil produced, which means there is a chance to drastically reduce carbon emissions through electrification of transport. In the BP’s (BP) Annual energy forecast for 2017,, it was forecast that the penetration of electric vehicles in 2035 would be 6 percent. Moving forward to 2021 and huge electrification of personal vehicles is happening. For Norway the country, 86% of all new automobile sales were electric by 2021. Similar numbers for Iceland (72 percent), Sweden (43%) and Netherlands (30 percent) are staggering, and the figures for China in 2021, 16 percent of the domestic new car transactions were electrical. The main driver behind the sales of electric vehicles is the recognition of the necessity to cut down on CO2 emissions.
The CAGR for electric car sales between 2016 to 2021 was 61 percent in Europe and 58% within China and 32 percent within the US. Five times more electric cars in 2021 when compared to 2015.
It will take time for the electricization of transportation to have some impact but it’s moving fast. Of the major producers, there is only Toyota (TM) is attempting to keep producing long-term an internal combustion engine. There is no evidence to suggest to suggest that Exxon Mobil management accepts what is now becoming apparent. There will be a ripple effect on the consumption of oil in the near future. My main concern is when and how will decommissioning of the old ICE (Internal Combustion Engine) fleet be dealt with?
Conclusion
In this article, I’ve discussed a variety of issues that should be considered by investors when making a decision on investing in XOM in the present. There is a mix of both long and short-term questions that are pertinent in the present. In the longer term, I would suggest that XOM’s license to operate is under scrutiny in a manner that before the company was in a position to avoid.
The main issue is the energy price and the role of renewable energy projects in transforming the parameters in favor of energy production that is managed locally, rather than through distant or unreliable (e.g. Russia) sources. This is the perfect moment to think about the evolving energy landscape and think about alternative opportunities for investment. It is clear that solar PV as well as wind (especially offshore) are emerging as the major investment opportunities are emerging. Why should you invest in an industry which is set to close? There is certainly potential for profit in an industry that is in the process of closing however, it’s an investment that is more complex than an industry that is experiencing massive growth.