ExxonMobil (XOM 0.02%) is a behemoth in the oil patch. However, its massive size is part of the problem. Like a large ship, Exxon takes a lot of time to change course. It seems that by the time it adjusts to market conditions, they shift again. The company has accordingly struggled to grow its production and create shareholder value in recent years.
That's one of the many reasons I'm not a fan of Exxon, even though oil prices have rebounded in recent months. There are lots of energy stocks I like better, led by Brookfield Renewable (BEP) (BEPC -0.09%), Devon Energy (DVN -0.89%), and Enbridge (ENB 0.68%).
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Better positioned for the energy transition
Exxon faces several headwinds, none more prominent than the accelerating shift toward cleaner alternative energy sources. While Exxon recently launched a new business unit focused on low-carbon energy, I don't think it's a bold enough strategy. It could get left behind as the global economy transitions to renewable energy.
One company leading the charge to displace Exxon in the global energy market is Brookfield Renewable, a world leader in renewable energy. The company operates or is developing 42 gigawatts (GW) of renewable energy capacity, which is enough to avoid 56 million tons of carbon dioxide equivalent emissions per year. That's similar to planting almost 1 billion trees. Compare that to Exxon's low-carbon strategy of building carbon capture and storage projects, which currently only capture 9 million tons of carbon, or the equivalent of planting 150 million trees.
Meanwhile, Brookfield's renewable-powered strategy has paid significant dividends for its investors over the years. The company had generated an annualized 20% compounded total return during the last two decades, while Exxon's compound total returns are a fraction of that at 4.6% annualized over those 20 years. While Exxon believes its fossil fuel investment strategy will pay bigger dividends in the future, I think Brookfield's renewable-powered plan will deliver better total returns.
Better positioned for higher oil prices
While higher oil prices tend to lift all boats in the oil patch, Exxon has a higher cost structure than some of its peers, putting it at a disadvantage. For example, Exxon needs oil to average at least $60 a barrel this year to generate enough cash to cover its capital program and 6.7%-yielding dividend. On the other hand, Devon Energy can finance its capital plan and 2.1%-yielding payout at sub-$40 oil. Devon therefore expects to generate a gusher of excess cash at $50 oil and even more now the crude oil is around $60 a barrel.
Devon plans to return up to half of those funds to investors via a new variable dividend program. It recently revealed its first payment, which was more than double its quarterly base payout. Meanwhile, it can use the rest of the cash it retains to shore up its already top-notch balance sheet. Contrast that with Exxon, which likely won't return any additional money to shareholders this year even if oil prices keep rising since it needs to retain those funds to pay down the debt it piled up last year. Devon's ability to immediately reward investors as oil prices rise makes it stand out compared to Exxon, which still needs to dig itself out of last year's hole.
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Better positioned for volatile market conditions
Last year's fluctuations in oil prices cut deeply into Exxon's cash flow because of its direct exposure to energy prices. The company didn't increase its dividend for the first time in years.
Contrast that with Canadian energy infrastructure giant Enbridge. Since it barely has any exposure to fluctuations in oil prices or volumes because of the fixed-rate contracts backing its business, Enbridge's cash flow continued growing last year. That enabled it to increase its 7.4%-yielding dividend for the 26th consecutive year. Meanwhile, the company has several expansion projects under way, including investments in several European offshore wind farms. That should give Enbridge the power to continue growing its dividend in the coming years. On the other hand, Exxon's payout is hanging by a thread and could head lower if oil prices tumble again.
Better options over Exxon
Exxon's massive size once gave it a competitive advantage in the oil market. However, that's no longer the case as ever-changing market conditions make it hard for the oil behemoth to adjust. The company looks likely to fall behind in the energy transition led by companies like Brookfield Renewable. Meanwhile, it doesn't have the upside to higher oil prices as nimbler rivals like Devon. Finally, it isn't the dividend stock it once was, making it less appealing than Enbridge. That's why I prefer this trio over the oil giant, which looks like its best days are in the past.
