Shares of globally diversified energy giant ExxonMobil (NYSE:XOM) rose as much as 5% on Sept. 16. There's little question about what drove the advance: Oil prices were higher and investors were upbeat about the future of the energy sector. Only, Exxon's stock is still down dramatically for the year, off by around 45%. There's a lot going on.
Oil has benefited from a couple of news items lately, including a larger-than-expected drawdown of oil inventories and a major storm in the Gulf of Mexico region that will result in curtailed production. That's helped to push the price of the key energy source higher today and investors bid up the price of Exxon along with it. This makes sense given that oil prices have a major impact on Exxon's top and bottom lines. But there's more to the story here.
Exxon has embarked on a major drilling program in an effort to get production growing again after several years of decline. It is among the largest capital investment efforts in the industry and, when undertaken, made financial sense. But oil prices have fallen drastically since this effort was announced and Exxon has been forced to pull back as earnings and cash flow shrink along with the price of oil. It just can't afford to spend as much as it once planned given where oil prices are today. In fact, there are very real concerns that, in an effort to support the company's smaller, though still sizable, exploration efforts, it may need to cut its dividend. That's not good news for dividend-focused investors and would be a major emotional blow for a company that has increased its dividend for 37 consecutive years. Higher oil prices, however, would obviously help to alleviate this problem and, as such, Exxon's stock tends to be extra sensitive to the price moves in the oil market today -- for better and worse.
The energy sector is volatile, particularly right now with weak oil prices and COVID-19 related supply and demand issues grabbing headlines. Add in Exxon's company-specific issues and it's easy to see why emotions are running high here, leading the stock to move dramatically on news that, frankly, is likely to be fleeting. Exxon is no longer the relatively "safe" option it was once considered. Today's uptick doesn't change that and, in fact, is just another example of how much has changed for the company. Exxon desperately needs to see oil prices rise in a sustained way, but that just doesn't look like it's in the cards right now.