Shares of ExxonMobil (NYSE:XOM) have rallied 50% so far in 2021. That's an incredible run that is roughly twice as large as any of its major peers. At this point, my switch into TotalEnergies (NYSE:TTE) might look like a mistake, given the French oil giant's stock is only up around 10% so far this year. However I'm not upset I made the move. Here's why.
1. No clear transition plan
I don't believe that the move away from oil and natural gas is going to be a quick one. In fact, I expect it to take decades, at the very least, for the world to materially shift from the carbon-based fuels that are currently at the core of the global economy. However, I'm not going to stick my head in the sand and ignore the fact that a clean energy transition is taking place. TotalEnergies, like many of its European energy peers, has laid out a plan for adjusting with the rest of the world. In fact, it was already going down that path before 2020, when it put forward its blueprint for a cleaner future.
Exxon, on the other hand, has been at best dragging its feet on the clean energy front. It has some projects, like using algae to make oil, but the goal today is still oil, oil, oil. Which helps explain why the company just had three outsiders elected to its board of directors. The trio was put forward by an activist investor that wants to prod the company to move more aggressively in the clean energy space. I believe the new board members will act responsibly in the interest of shareholders, so I don't think their addition is a major risk. However, it's pretty clear that Exxon has been resisting the bigger changes taking shape in the broader energy sector today. I'd rather stick with an energy company that has already created a plan for the future that includes renewables.
2. Pulling back
The coronavirus pandemic was disastrous for the energy industry, as the economic shutdowns enacted to slow the spread of the virus severely depressed oil demand. Prices plunged, as you would expect, and oil companies across the board pulled back on their capital spending plans. That's not at all shocking and, frankly, it was the proper decision. The problem for Exxon is that it had major investment plans in place that were needed to reverse its weak production trends. Put simply, that spending wasn't really optional.
So the pullback in spending in 2020 to preserve cash presents a material long-term problem for Exxon. It really has to get its spending back on track. With oil prices back to pre-pandemic levels, it would seem an easy call to ramp up its investment plans again. However, given the clean energy zeitgeist and the new board members, that may not happen quite as quickly or seamlessly as one might hope.
In fact, there could be notable changes to the goal post. That's merely conjecture at this point, but there is a very real risk that delays or alterations in Exxon's capital investment plans have a lingering impact on its business. TotalEnergies' long-term plan, which as noted above includes clean energy, still involves growing its carbon fuel business (largely via natural gas investments). I'm far more comfortable with that than what appears to be a major retrenching at Exxon.
3. We promise to pay
The last reason that I'm happy with my switch to TotalEnergies is a bit harder to quantify, at least on the Exxon side of things. During 2020 TotalEnergies made repeated commitments to its dividend so long as oil prices remained around $40 per barrel. That provided a line in the sand for me to monitor when I considered the risk of a dividend cut. Oil is well above the $40 level now, so there's little dividend risk today. That said, TotalEnergies has made clear that strengthening its balance sheet is more important right now than growing the dividend. So I don't expect dividend increases, but at least I know where I stand.
Exxon's commitment to its dividend doesn't come with a similar line in the sand. That's not to suggest that the company hasn't highlighted the importance of the dividend; it very clearly has. But what that means is kind of up in the air. Exxon, after years of annual hikes, hasn't increased the dividend since the second quarter of 2019. That hardly suggests a cut is coming, but the company's over 30-year streak of increases will end if it doesn't raise the dividend by the end of 2021. That would likely rattle dividend investors and represent a major shift in direction. At this point, it is hard to rule out that possibility, however; management used to talk about a "growing" dividend and now just discusses sustaining a "strong" dividend.
Knowing where I stand
At the end of the day, Exxon is bouncing back strongly with rising oil prices because an improving top line will reduce many uncertainties about the company's future. That's great, but it doesn't change the fact that there are still some material unknowns, including how it plans to deal with the clean energy shift (notably what will happen with the new directors it was forced to add), how its reduced spending plans will impact its long-term future, and what will happen with its dividend.
With TotalEnergies I have a better handle on each of these issues, and that helps me sleep at night. So in the end, Exxon has outperformed, but I'm not at all upset that I'm missing out on the price rebound. What I own is still a better fit for my portfolio.