Exxon-Mobil (XOM) is having a rough time. The oil giant is facing lawsuits, allegations of hiding climate change risks, the rise of electric cars, and massive declines in revenues.
The biggest threat to Exxon-Mobil (NYSE: XOM) in the United States is lawsuits. Currently, there are so many lawsuits pending against Exxon it is hard to keep count.
For example, InsideClimateNews’ David Hasemyer counts 13 to 14 government lawsuits and nine “children’s lawsuits.” Keeping track of the suits is hard because courts are constantly dismissing and reinstating them.
Exxon-Mobil is a prime target for lawsuits because of a 2015 Los Angeles Times investigation that exposed hundreds of documents. The documents expose research that indicates Exxon management knew of potential global warming dangers in the 1980s.
Money is the real reason for Exxon-Mobil (XOM) Climate Change Lawsuits
Money rather than moral outrage is the probable motivation for the lawsuits. Exxon-Mobil’s (XOM) financial numbers indicate the company is generating a lot of money.
For example, Exxon-Mobil reports a free cash flow of $2.853 billion; and an operating cash flow of $7.78 billion, for 2nd Quarter 2018. Moreover, Exxon-Mobil earned a $23.799 billion gross profit on $73.501 billion in revenues during the 2nd Quarter.
Exxon-Mobile received a $3.95 billion net income and a $6.659 billion in operating income in 2nd Quarter 2018. However, Exxon-Mobile had only $3.43 billion in cash and short-term investments on June 30, 2018.
Therefore, Exxon-Mobil is not making that much money for a company that generated $244.363 billion in revenue in 2017. Exxon-Mobil generates a lot of revenues but it does not keep that much money in the bank.
Another problem is that Exxon-Mobil’s high revenue growth (26.56% in 2nd Quarter 2018) is not translating into cash. The return on Exxon-Mobil’s revenues is low.
How Lawsuits Threaten Exxon-Mobil
Under these circumstances, governments and activists are suing a company that has little cash. An obvious conclusion to make here is that the lawsuits are publicity stunts and political ploys.
For example, New York State claims Exxon-Mobil defrauded shareholders by lying about climate change risks in a lawsuit. The suit is apparently an attempt to gather information about Exxon-Mobil using a state law called the Martin Act, The New York Times reports.
To clarify, New York State Attorney General Barbara D. Underwood thinks she dislodge Exxon-Mobil’s secrets by charging the company with security fraud. In addition, the suit is an attempt get around federal lawsuits Exxon-Mobil is using to block state investigations.
Unfortunately, such lawsuits can hurt Exxon-Mobil and its stockholders by draining off money that could be dividends. A long-term threat is governments using lawsuits to gather money as a pretext for higher taxes.
An even greater risk is governments using lawsuit data as a pretext to ban fossil-fuel burning vehicles. Several countries; including China, the UK, France, Germany, Norway, and India, are planning internal combustion engine bans as early as 2030, Futurism reports.
The lawsuits come at a poor time for Exxon-Mobil because it cannot wring cash out of its business anymore. An obvious risk from the bans is Exxon-Mobil being forced out of specific markets.
How safe is Exxon-Mobil’s Dividend
Currently, there is only one reason to buy Exxon-Mobil (XOM), the dividend. For instance, XOM paid an 82¢ dividend on 10 September 2018. That dividend was up from 77¢ on 9 March 2018.
The climate change controversy, lawsuits and the theoretical threat of electric cars threaten that dividend. Also under threat are the 3.99% dividend yield, $3.28 payout, and 77.13% payout ratio reported on 19 October 2018.
Despite the threats investors can still make money because Exxon-Mobil (XOM) reported 35 years of dividend growth on 19 October 2018. The billion dollar question here is how long can that dividend growth continue.
Exxon-Mobil is No Longer a Value Investment
Based on these circumstances, I conclude that Exxon-Mobil (XOM) is still a good income stock but it is no longer a value investment.
I think Exxon-Mobil is no longer a value investment because of the outside risk it faces. The company is making money but it faces a shifting environment and growing challenges every day.
An example of the risks is the almost incredible growth of electric vehicles. Just two or three years ago there was one serious electric maker; Tesla Motors (NASDAQ: TSLA) that served a niche market.
Today, several major automakers are planning to mass produce electric vehicles (EVs) for a wide market. For instance, Volkswagen AG (VLKAY) plans to market 10 million EVs in its first wave of electrics, CNBC reports.
Are Electric Cars a Threat to Exxon Mobil?
Notably, Volkswagen claims it will spend €6 billion ($7 billion) to create 27 electric models. Additionally, Ford plans to spend $11 billion to roll out 16 electrics by 2022 and General Motors (NSYE: GM) has plans for 23 electrics by 2023.
The carmakers obviously think electric vehicles are a real technology. Therefore, Exxon-Mobil could expect to see falling demand for fuel over the next decade.
Given these realities I think the market overpriced Exxon-Mobil (NYSE: XOM) at $77.62 on 24 October 2018. Exxon-Mobil is still a good speculative and income stock, but it is not a value investment. Conversely, Exxon-Mobil is a good speculative play for those betting against electric cars and climate change deniers.
Shrewd investors might hedge their bets by buying both XOM and a carmaker like GM or Volkswagen. That way they can bet for and against electric cars at the same time.
A traditional carmaker like Ford is a great hedge because companies like Ford will make both electrics and fossil-fuel vehicles. Consequently, Ford or GM will make money no matter what powers the vehicle in your driveway.
Only those investors with a high tolerance for risk should buy XOM right now. The environment in the oil industry is just too insecure because of climate change for anybody else to touch Exxon-Mobil.