I think ExxonMobil (NYSE:XOM) is a great oil company, but I sold it in 2020. I replaced it with a new energy company that is making a long-term shift, along with the broader energy sector, that Exxon hasn't yet started. Here's a look at the company I chose, and why I think it's my best oil stock for 2021.
Buying and selling
There's no way around it, 2020 was a disaster for energy stocks like ExxonMobil, which was down 40% for the year. That said, it was a big win for Tesla, which was up 740%. I don't directly own Tesla, but one of the mutual funds I do own, Baron Partners Fund, does. It's a huge position in the fund's portfolio, making up 44% of assets at the end of 2020. That was just too much exposure to Tesla for my taste, so I sold roughly half of my position in Baron Partners Fund last year, booking a profit. To offset some of the capital gains taxes I knew I'd be facing, I captured my losses in Exxon.
But I didn't want to get out of the energy sector -- I still believe that the cyclical industry will remain a vital cog in the world's energy needs for a long time to come. The huge downturn in 2020, driven in large part by coronavirus issues, is likely to reverse as the industry adjusts to a new supply/demand scenario.
However, that short-term view needs to be considered along with the long-term picture, which isn't as clear-cut as I might like. Indeed, clean energy alternatives, like solar and wind power, are helping to shift the world toward a lower carbon future. For example, electric vehicles are gaining in popularity and displacing products that are vital to energy drillers like Exxon. Since Exxon has remained committed to the oil and natural gas space, I decided to replace it in my portfolio with France's Total (NYSE:TOT), which is taking a different approach.
My energy pick
Buying Total wasn't an easy decision, but it is my top energy pick for 2021 -- and, with any luck, many years beyond. In 2019, before the oil crash, it generated around 95% of its sales from oil and natural gas businesses, so it is very much an energy stock. When energy markets pick back up, it will definitely go along for the ride. So I continue to have notable exposure to the energy sector.
That said, peers Royal Dutch Shell (NYSE:RDS.B) and BP (NYSE:BP) cut their dividends in 2020. Like most dividend investors, I prefer to avoid dividend cuts. However, investors have become increasingly concerned that Exxon's dividend could be at risk. It has voiced support for its dividend, but it hasn't given any clear guidance on the issue other than that the dividend is important. Total's management, on the other hand, has specifically stated -- including during Total's third-quarter 2020 earnings conference call -- that its current dividend is supportable so long as oil averages around $40 per barrel. I like that line in the sand, since it gives me something to monitor.
Meanwhile, looking out to the future, Exxon's steadfast commitment to oil and natural gas is increasingly looking out of step with the world's push to lower carbon emissions. Shell and BP have announced plans to shift dramatically in the clean energy direction, which was part of the reasoning for their dividend cuts (though not being able to cover their dividends and capital spending needs was probably a bigger concern). They are moving too far, too fast for my taste, though. I believe the transition away from oil and natural gas will be spread out over decades.
Total is taking a more center-of-the-road approach, with the goal of tripling the size of its "electrons" business from 5% of sales in 2019 to 15% of sales in 2030. This, however, isn't a new business for Total, which has a fairly long history of investing in the electricity space. So it is just planning to do more of what it has already been doing.
While on the surface that suggests that Total's energy business will decline in size, that's not actually the goal. The energy giant does want to reduce its reliance on oil, which it plans to shrink from 55% of sales in 2019 to 35% in 2030, as it refocuses on its lowest-cost assets. But it wants to increase its natural gas business from 40% of sales to 50% over that span as well, growing in what is expected to be a vital transition fuel as the world moves toward clean energy. By 2030, it projects that the combination of those two businesses will be larger than they were in 2019. The electrons business will expand on top of that, further increasing the total sales of the company. In other words, Total isn't expecting to shrink anything -- it is focused squarely on growth. That's a plan I can get behind.
Hedging my bets
In the end, I'm basically punting. I still like the energy sector, but I am well aware that the long-term future is likely to be a lot more electric. Even though Exxon remains a great oil company, it basically hasn't taken material steps to address the clean energy changes taking shape around it.
Shell and BP, meanwhile, have gone too far for my tastes. Total sits somewhere in the middle, and has clearly stated its dividend intentions. That's pretty much exactly what I'm looking for as 2021 gets under way.