ExxonMobil (XOM 0.99%) has fallen on hard times. Shares of the oil giant have tumbled more than 40% this year, weighed down by the impact lower oil prices are having on its finances. That puts the oil stock about 60% off its former peak, which it hit when oil prices were last in triple digits.

While Exxon has a deep hole to climb out of, it has had its share of ups and downs in the past. Here's a look at whether this oil stock will rise from the ashes again.

An oil pump with the sun bursting behind it.

Image source: Getty Images.

The case for a revival of the glory days

One reason Exxon's stock tumbled this year is that oil demand fell off a cliff as governments shut down their economies to slow the spread of COVID-19, which weighed on pricing. However, consumption has started rebounding as those restrictions are lifted and should return to its pre-pandemic levels within the next year and a half, according to a forecast by the International Energy Agency (IEA). Meanwhile, the IEA expects oil to remain vital in fueling the global economy for several more decades, despite the rise of renewable energy and electric vehicles (EVs). 

Because of that, the oil industry will need to continue investing money to meet future demand. Not only will the sector need to support the economy's growth; it will also need to replace depleting supplies from legacy oil and gas reservoirs. In the IEA's estimation, the oil and gas industry will need to invest $20 trillion over the next 20 years to meet the projected demand. 

That forecast bodes well for ExxonMobil, which has billions of barrels of low-cost oil supplies to tap. When the company put out its long-term strategy in 2018, it expected to grow its earnings by 140% from 2017's baseline by 2025 as it invested in expanding its production. That would have enabled it to produce $190 billion of cumulative free cash flow, -- assuming oil averaged $60 a barrel -- which would have allowed it to cover its high-yielding dividend with $90 billion to spare. That forecast shows the potential power of Exxon's business model if oil prices cooperate.

Why Exxon might never recover

Unfortunately for Exxon and the rest of the oil industry, oil prices haven't cooperated this year as they crashed along with the economy. While they have since recovered -- oil was recently in the low $40s -- that's well below Exxon's break-even level, even after it slashed its capital investment program. At that price point, Exxon is only generating enough cash to cover 70% of its capital program, meaning it's funding that gap and its dividend with more debt. 

That's not a sustainable strategy, which has investors worried that Exxon will eventually cut its dividend. Meanwhile, even if oil recovers, Exxon will need to use a substantial portion of its future free cash flow to pay down debt, which will likely act as a weight holding down its stock price in a recovery.

Another factor that will likely impact Exxon's valuation is investor sentiment. Even if oil prices rally in the future, investors will be reluctant to buy oil stocks. Not only has the sector burned them repeatedly because of volatility, mismanagement, and underperformance, but it's also losing ground to renewable energy. As a result, an increasing number of investors simply don't want to own fossil fuel stocks anymore, given their impact on the climate. With fewer buyers, valuations won't improve that much even if market conditions do. 

I wouldn't bet on a return to glory

Barring a massive spike in oil prices, it seems like Exxon's best days are in the rearview mirror. While the oil industry will likely remain relevant for a couple more decades, which should enable Exxon to continue developing new oil projects, it will steadily lose market share to renewables and EVs. Add that to the rising investor disdain toward the industry and Exxon's current financial woes, and it's hard to envision a bright future for this beleaguered oil stock.