Although the stock market has started to rally, many sectors have yet to rebound. That is very true in the oil and gas industry. Many of our Texas clients are reliant on the oil and gas sector for both their work and retirement benefits. With that in mind, we will take a look at oil and gas stocks in terms of the impact on your portfolio and the ancillary impacts on your planning – especially for those working in this sector. Please continue reading below and to hear more, please check out a special edition of the STA Money Hour where Kevin and Scott take a deeper dive into both the article and planning issues.
Energy Sector Stocks – Focus on ExxonMobil:
Although Avidian Wealth has worked with clients working for oil and gas companies from Anadarko to Zapata, for the investment portion, Kevin will be focusing on ExxonMobil Stock for today’s discussion.
On Monday, August 24th, S&P Dow Jones announced that ExxonMobil will be removed from the Dow Jones Industrial Average on August 31st to make way for Salesforce. Exxon was first added to the Dow in 1928 and signifies a stunning fall from grace for a company that was the world’s largest as recently as 2011. When a company is removed from an index like the Dow or S&P 500, it is a strong headwind to that stock as many index funds are forced to sell that stock – we saw it similarly happen to Shell Oil stock back in 2002 when it was taken off the S&P 500 index where the stock lost 10% in a single day.
The Dow is a price-weighted index, so the actions were prompted by the 4-for-1 stock split announcement by Apple, which will reduce its current 12% weighting in the index. As a result, S&P made the change to increase the weighting of technology companies.
The removal of Exxon represents years of underperformance versus Chevron, which has a stronger balance sheet and better operating/earnings metrics. Chevron will now be the only energy company in the energy sector and brings the Dow sector weightings closer to the broader S&P 500.
Comparison of ExxonMobil vs. Chevron vs. the S&P 500 Index:
After having one of the strongest balance sheets in the sector just four years ago, net debt to cash flow from operations has jumped from 1.7X during the last downturn in 2016 to ~3.6X this year. This has been largely driven by the sharp increase in capital investment for new development projects in recent years.
This cycle has also been different in that their Chemical and Downstream businesses have not materially helped offset the weakness in the Upstream business. These businesses were a reliable source of funds to help cover the dividend. The return on invested capital in these businesses was 21%/18%, respectively from 2000 – 2018. However, they averaged only 8%/2%, respectively in 2019. Further, it appears that their competitive advantage in these businesses has faded to some degree, and the intermediate-term road back to consistent double-digit returns looks challenging.
Despite reluctantly cutting capital investments by $10 billion from $33 billion, analysts are estimating that Exxon will need Brent to be in the mid-to-upper 50’s to cover its dividend with free cash flow next year. This includes the recently announced 15% reduction in operating expenses, as well as the upcoming suspension of the employer match to their Company Savings Plan on October 1st. Given Exxon’s commitment to longer-term investment projects, net debt to cash flow is still likely to remain above 2.0X, which is above their peer group.
While free cash flow is insufficient to cover the dividend, Exxon appears committed to retaining their current $0.87 quarterly dividend. During the most recent earnings call, SVP Neil Chapman stated that “a large portion of our shareholder base has come to view that dividend as a source of stability in their income and we take that very seriously.” He also mentioned that about 70% of its investor base are retail investors. Although Exxon has the highest dividend yield among its peers at ~8.50%, it’s not a good reason to buy the stock as the company likely can’t fund the dividend for the next few years without drawing down cash, selling assets or borrowing funds.
Despite the higher balance sheet risk, Exxon is betting that their compelling project in Guyana as well as those in the Permian and LNG will pay off. At least for the short-term, Exxon stock lacks positive catalysts on a variety of metrics versus their peer group.
Financial Planning Implications:
At Avidian Wealth, we have seen many of our long-term and new clients impacted by the financial hits that keep coming to companies in the oil patch in terms of layoffs, a reduction in benefits (an example is losing pension or 401k match benefits), severance packages and worries about early retirement and the financial impacts to portfolios where many have concentrated positions in their company stocks. If you are concerned about these issues, we wanted to share links to many resources and articles on our website:
- Retirement Survival Guide (including stress testing your financial plan using Monte Carlo Simulations).
- Layoff Survival Guide (including reviewing severance packages)
- Managing Concentrated Stock Positions (and related Investor Biases)
- Stress Testing Your Portfolio – to see the impact of market forces and reviewing your portfolio allocation to assure it is aligned with your financial plan – especially as you enter retirement.
- Maximizing Your Pension or Social Security Benefits
- Rolling Over Your 401k (including Net Unrealized Appreciation / NUA decisions) and 2020 Impact Related to the SECURE Act and CARES Act.
- Using Options to Hedge Your Portfolio (options strategies such as covered calls, protective puts and/or collars, etc.)
- Getting or Keeping Your Financial Plan on Track (setting financial planning goals)
- Avidian Wealth’s Financial Planning Process (Short Video)
These issues can be complex. Please use these resources, but feel free to call us if we can help you walk through any decisions you may have to make in terms of your financial or retirement plan.
The information herein has been obtained from sources believed to be reliable, but we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security or product. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Avidian Wealth Solutions), or any non-investment related content, made reference to directly or indirectly in this presentation will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this presentation serves as the receipt of, or as a substitute for, personalized investment advice from Avidian Wealth Solutions. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Avidian Wealth Solutions is neither a law firm nor a certified public accounting firm and no portion of this article should be construed as legal or accounting advice. A copy of the Avidian Wealth Solutions’s current written disclosure statement discussing our advisory services and fees is available for review upon request. ALL INFORMATION PROVIDED HEREIN IS FOR EDUCATIONAL PURPOSES ONLY – USE ONLY AT YOUR OWN RISK AND PERIL.