New York – ExxonMobil, the oil and gas behemoth with origins dating back to the 19th century, faces an uncertain future amidst the accelerating global energy transition. While ExxonMobil remains a mainstay in many large-cap investment portfolios, several troubling factors indicate investors should exercise caution before betting on the company in the years ahead.
Most critically, ExxonMobil’s recent acquisition of shale giant Pioneer Natural Resources for $59.5 billion in an all-stock deal could become an albatross for the company. With global oil demand projected to peak in the coming decades as electric vehicles and renewable energy gain market share, bulking up on fossil fuel assets via this purchase may haunt ExxonMobil down the road. Pioneer shareholders received ExxonMobil shares in the deal, meaning they could become major sellers if the combined entity falters amidst the energy transition. Regulators are also heavily scrutinizing the merger, potentially jeopardizing its completion.
Beyond the risky Pioneer deal, ExxonMobil shares have treaded water over the past year, underperforming the broader energy sector rally earlier in 2023. This relative weakness reveals creeping concerns about ExxonMobil’s long-term viability as the world transitions to cleaner energy. With the stock hovering around the $100 mark, a significant oil price decline in the next 6-12 months could break important technical support levels and trigger 15% downside or more.
Adding to the cautionary case, Wall Street analysts remain stubbornly bullish on ExxonMobil despite its challenges, with 14 Buys, 4 Holds and not a single Sell rating. However, the average price target of $131 looks overly optimistic, implying 30% upside from current levels to a record valuation that ExxonMobil has never sustained. This lofty upside forecast seems disconnected from the technological, regulatory, and market risks gathering around the oil major.
Recent financial results also raise red flags. ExxonMobil’s third quarter 2023 profits plunged a massive 54% versus the same quarter in 2022, missing estimates by a wide margin, on lower oil and gas realizations. Revenues dropped 19% amidst heightened economic uncertainty and wavering oil demand. Weaker quarters could persist going forward as the energy transition picks up speed.
Legendary investor Warren Buffett provides another reason to be wary. His Berkshire Hathaway conglomerate owned ExxonMobil shares sporadically between 2009 and 2014, but has avoided it completely since then, instead holding major stakes in Chevron and Occidental Petroleum. This avoidance signals long-term concerns about ExxonMobil’s changing prospects.
ExxonMobil’s share price lingering above $100 also presents a challenge for smaller retail investors looking to buy meaningful positions without pooling capital into index funds. The stock hasn’t split since 2001, whereas tech giants like Alphabet and Amazon regularly split to maintain accessibility. This lack of a split indicates ExxonMobil’s diminishing appeal for younger investors focused on renewables.
Moreover, ExxonMobil faces existential long-term risks from decarbonization policies and competing clean energy technologies. Major economies worldwide are enacting aggressive legislation to reduce carbon emissions and restrict fossil fuel extraction. Renewable energy sources like solar and wind, along with electric vehicles, are seeing massive investment and exponential growth. These secular trends threaten to make ExxonMobil’s traditional business model obsolete within decades.
In summary, between ExxonMobil’s risky mega-acquisition, stagnant share price, declining earnings, loss of Berkshire’s confidence, triple-digit sticker shock, and technological disruption, investors have many reasons to think twice before betting on the oil major. While fossil fuel demand persists currently, ExxonMobil must navigate intensive headwinds as clean energy scales globally. Given the challenges ahead, investors keen to buy may want to build positions gradually should the stock stumble. But the long-term thesis seems to be shifting decisively against ExxonMobil.
