Bank of America Merrill Lynch is touting broken-down stock Exxon Mobil as their top pick for 2020 in the broken-down energy sector. This in itself doesn’t count for much though.
Analysts at Bank of America Merrill Lynch are excited about the prospects of Exxon Mobil stock over the next year, and have named the stock their top pick for 2020 in the energy sector. They are predicting a 47% rise in the price of the stock, taking it from getting kicked around like a dog by the market to having hope in the prospects of its stock price see a big leap from expected increases in production.
This pick is a great example of how it is one thing to look to project a company’s near-term business results and quite another to predict where its stock price may end up as a result. There is much more going on than may meet the eye with a company’s stock price, and even though the analysts try to pretend that their projections for the company’s business and their expectations for the company’s stock represent the same thing, this view is mistaken.
There are times where the two do align pretty well, but only by coincidence. It is not that the business outlook for the next year does not matter, but to seek to oversimplify this by believing that this is the only thing that matters or even that this is the most important thing ends up being exposed as fantasy when we consider that the outlook beyond this point matters and matters a great deal.
It only makes sense that it would, and if we imagine that we were wanting to invest in a stock like Exxon Mobil, unless we’re planning on only sticking around until 2020, the company’s picture beyond 2020 and well beyond it in fact is going to matter to us a lot, as it should.
If the longer-term report card and the shorter-term one that is being looked at by analysts align, we have our coincidence, but the two often do not, where the future may be dimmer or brighter than the present and focusing on the near term may miss a lot on either side of this.
Energy stocks in particular are subject to dimmer outlooks than average, and the very nature of this business causes this, as the long-term future is not so bright at all for a company like Exxon Mobil, in an industry approaching old age and the decline that comes with it. This will ultimately be taken to its inevitable conclusion as production declines due to dwindling supply and demand decreases as well as we move more and more toward alternative sources of energy.
When masses of people take to the streets to protest against you, and this movement just keeps growing and keeps getting angrier, this also does not bode well for you. The burning of fossil fuels that these mobs are so hell-bent against is too important to be able to step away from too much, but the fact that we are trying to do this should not excite us if we wish to profit from holding these stocks.
It’s so much easier to make forecasts if we just pretend that what is beyond the horizon does not exist, but it’s even hard to imagine how anyone could ignore such things. This blindness is real though and does shape the thinking of analysts such as those from Bank of America Merrill Lynch who are seeing increases in production with Exxon Mobil and expect that to translate directly to its stock price.
Production may indeed increase, and the company is in the process of redirecting its resources toward projects with more potential such as in Guyana as well as its shale project in the United States, but how much this may help their stock price is another matter entirely.
Exxon Mobil is planning on selling off $25 billion of its current assets by 2025 in an effort to repurpose these toward these more lucrative fields, which certainly may end up helping their bottom line, and this is cited as a big reason why Bank of America Merrill Lynch’s outlook on it has improved. The one problem with this is that this is already known and it has already failed to kick-start this stock, and there isn’t a good reason why it will, since this is old news already.
Exxon Mobil Spending to Increase Production is Part of the Problem
Exxon Mobil currently has a cash flow problem and one bad enough to cause Moody’s to downgrade the company last month, from stable to negative. The previous stable rating for the company was already not very good for the stock, which has been anything but stable and is mired in a 5-year downtrend where it has given back over a third of its value, and we may now be going from the frying pan to the fire based upon this downgrade.
It did try to come back a little in the first quarter of this year but the move fizzled and they are now trading below where they were to start the year, in one of the best years for stocks ever. If this is stable, we should be shuddering when we think what negative is going to look like.
If the hope for a comeback is pinned on their spending even more on ramping up production when this is seen as the problem by Moody’s, not the solution, these hopes are on tenuous ground indeed.
Exxon Mobil has already done this, and the explanation as to why this hasn’t helped much is blamed on movements in the price of oil, which is expected to remain beaten down even by OPEC and even after their best efforts at trying to prop up oil prices, which they are currently meeting to discuss.
Exxon Mobil also represents a great example of the darker side of a company paying out dividends, something that has been taken for granted but does have a negative effect on both the company and the stock over time.
They are reducing their cash flow by $3.75 billion each quarter, and to get an idea of the scale of this, at the current rate they will have paid out $90 million by the end of 2025, in comparison to the $25 billion that they are expected to raise by this point by selling assets to raise cash. This can only be described as cannibalization by way of stubbornness.
In any case, they do have a cash flow problem, they refuse to reduce dividends to address it, and are selling off assets instead to deal with this and keep production growing, and production growing may not help because this all comes down to where the price if oil is going. The price of oil isn’t projected to be very favorable.
There’s also the part about how well whatever improvements will play out in the stock market, and given the dimmer longer-term outlook of the company, we also need to wonder whether the fortunes of this stock will just remain in the doldrums regardless.
When Nothing Seems to Help a Stock, It’s Time to Leave, Not Enter
To get some insight as to what effect recent business improvements may have upon this stock, we can just look to 2017 and 2018. Earnings in 2017 grew by 146% year over year, and the stock went down instead of up. Earnings in 2018 were even better, and the stock went down instead of up once again.
It’s down again in 2019 thus far, and from just looking at this, if we think that better earnings lead to higher stock prices, and we are still thinking this after viewing just this, something is dreadfully wrong with our thinking. Perhaps it’s that they just haven’t bothered to look to see if their ideas play out in the real world, but that should scare us more.
This should not surprise us, as we are just looking at a piece of the puzzle and think that it is the whole puzzle. The other pieces may be quite different and our piece with the smiley face on it can easily be outweighed by bigger pieces sporting frowns.
When we are in a sector that is clearly dying, we need to realize that the deterioration that results will both impact business growth and the growth of stock prices, and it will especially effect stock prices since stocks are forward looking and are peering down this dark alley as we speak.
The energy sector itself suffers from all this, and this is not a sector that we should ever want to be in long-term, because the long-term outlook just isn’t good enough and is particularly inferior to some other sectors which are far more promising, such as technology. Technology and energy stocks are on opposite sides of the spectrum, the most exciting and the most dismal. We want to make sure we’re not on a bad horse and especially not riding a very bad one that will throw us off and have us falling on our faces into an oily mire.
If for whatever reason we insisted on being in the energy sector for the long haul, it’s hard to imagine why Exxon Mobil would be a worthy choice, as it is one of the sicker horses in a stable full of sick horses. When your stock has performed so terribly, and your company gets downgraded by Moody’s to negative, and the best we can do is repeat things about the company that the market already knows about but doesn’t care about, it is incredibly difficult to imagine how anyone would see this as a good idea.
Bank of America Merrill Lynch does though, and sees this stock getting back to $100 soon, up from the $68 a share it trades at now. The reasons that they present to back up this view simply aren’t convincing at all, and while anything is possible, this is just far too unlikely to happen.
We can’t even pin our hopes on the market raising the level of the ocean and our boat rising due to this, because we had lots of that in 2019 and this boat just sunk further underwater. If neither the market climbing, oil prices climbing, or even business results climbing fail to kick start this stock and get it moving in the right direction, there just isn’t anything left to pin our hopes on.
The kids that occupied the field at half-time during the Harvard/Yale game may have been justified to protest their schools’ holding energy stocks, but for a different reason. While their holding these stocks rather than someone else does not make any difference to the environment, they may wish that these endowments choose better investments than this, but college kids don’t care about endowments.
Perhaps someone should care though, and while the colleges hire people to care, if both the people managing the assets and their clients are both clueless, there is no one left to ask the right questions such does it make more sense to invest in something else.
That’s not a question that is asked very much by anyone, and if we just ignore any opportunity costs, they won’t be perceived and no one will be held accountable for the continual rationalizations that allow this to persist. If you can blame the market when things go wrong, the worst advice will continue to be immune from judgement, and when this happens, the status quo will continue to reign.
The chances of Exxon Mobil going up by 47% over the next year or anything close is nothing but a pipe dream. What will more likely happen instead is that the stock will just beat around like it’s been doing, going nowhere fast, and while this may present some good opportunities for traders to trade the ebbs and flows that you always see with a stock, this requires skills that investors both don’t have and are even afraid to learn. Over an investor’s time frame, there are simply much better things to have our money in right now.