ExxonMobil (XOM -2.78%) runs with a pretty distinguished group of peers, all of which are giant international energy producers with diversified businesses. Despite immense pressure to shift hard toward clean energy, Exxon is sticking close to its core oil and natural gas businesses. But investors need to think long-term before they make a final judgment call. Here's why Exxon could be worth buying even as the world pivots toward renewable power.
Exxon is an industry giant
Exxon has an over $400 billion market cap. That makes it larger than Chevron, Shell, TotalEnergies, and BP, its closest peers. In fact, the second-largest integrated energy company on this list is Chevron, with just a $285 billion or so market cap. Simply put, Exxon is the 800-pound gorilla of the group.
XOM Market Cap data by YCharts
What's notable is that the company's European peers, Shell, TotalEnergies, and BP, have all started to invest more heavily in clean energy assets. That's on trend with the world, which is pushing a transition away from carbon fuels. And yet Exxon appears to be leaning into carbon, noting that it has recently agreed to buy U.S. oil and natural gas producer Pioneer Natural Resources. The price of that transaction is a hefty $59.5 billion, though it is an all-stock transaction so there's no cash changing hands. Including debt, the deal is valued at $64.5 billion.
Why would Exxon do this? The answer is actually pretty simple: The major energy monitoring groups all agree that oil and natural gas will remain vital parts of the global energy picture for decades to come. That will remain true even as clean energy investment grows materially. The reason that's not as discordant as it sounds is because the global population is still growing and world economies are still moving up the socioeconomic ladder, which generally leads to more demand for energy. In other words, the pie is getting bigger so there's plenty of room for both carbon fuels and clean energy.
In that scenario, there's no particular reason to dump Exxon stock. In fact, you might want to add some shares to your portfolio if you like owning industry giants with lofty yields and strong dividend histories. Exxon, for reference, has a 3.7% yield (the S&P's yield is only 1.4%) and has increased its dividend annually for over 40 years.
Some more reasons to like Exxon
In fairness, given the volatile nature of the energy sector, investors can't really look at dividend payout ratio to get an idea of the safety of Exxon's dividend. Indeed, Exxon's earnings can and do swing wildly between black ink and red ink. What's more important is the board's commitment, which four decades of increases suggest is strong, and the company's preparation for hard times. On that front, Exxon's debt-to-equity ratio is a very modest 0.1 times or so.
XOM Financial Debt to Equity (Quarterly) data by YCharts
That provides a huge amount of leeway for Exxon to take on debt during oil industry downturns so it can continue to support its business and its dividend. When oil prices rebound again, as they have historically, the company pays down the debt to prepare for the next weak patch. If you can handle buying oil when the world is screaming clean energy, giant Exxon seems fairly well positioned.
But what about the Pioneer deal? Yes, it means Exxon is doubling down on carbon fuels. But step back and think about this in a different way. Exxon is so big that it can easily buy a $60 billion company. That company doesn't have to be an oil company, it could just as easily be a clean energy company. Clearly, that's not what management thinks should be done today, but at some point Exxon could pivot and very quickly build up its clean energy bonafides.
When the time is right look for Exxon to act
Exxon knows how to produce oil and natural gas at scale and in an efficient manner. Sticking to this core ability while these energy sources are still in high demand makes solid business sense. Obviously if you prefer to avoid carbon fuels you'll want to avoid Exxon. But don't simply dismiss it out of hand if you are looking for an energy stock, defining the sector as broadly as possible. Yes, Exxon is the oil industry giant today, but it could easily use its heft to pivot when the time is right. In other words, dividend investors who like to buy big industry players with strong dividend histories shouldn't fear owning Exxon even as the world transitions to clean energy.
