Chart of the Week: Buy Oil Stocks If You Like Losing Money
June 4, 2021
For investors in the early 2000s, holding oil stocks would have been a winning strategy. The price of Brent crude oil started the new millennium at US$25 a barrel.
As China’s voracious appetite for oil gathered pace amid red-hot economic growth and the rise of globalisation, the oil price soared to a record high of US$145 in July of 2008.
That ended up minting those investors who held oil stocks during those eight years.
However, for long-term investors, how it’s played out since then is rather more depressing as the collapse in oil prices demonstrates.
Heads in the sand
Perhaps the best example of this massive decline is Exxon Mobil Corporation (NYSE: XOM), which this week saw its management humiliated by activist investors keen on ensuring a sustainable strategy for the company in a zero-carbon world.
Activist fund Engine No. 1, which holds an inconsequential 0.02% stake in Exxon, managed to snatch three Exxon board seats after putting four candidates up for election.
Engine No. 1 had the backing of prominent institutional investors, such as large pension funds like CalPERS and the New York State Common Retirement Fund.
Sick of CEO Darren Woods’ insistence on pushing on with a fossil-fuel driven strategy, which had destroyed Exxon’s share price, the fund’s latest win highlights how change is being pushed through.
Losers keep on losing
It’s no surprise. Looking at the destruction of value says it all. In 2010, Exxon Mobil was the world’s most valuable company by market cap.
By the end of 2020, Exxon’s market cap had been cut in half (see below). Today, the company’s share price still sits about 40% off its all-time high reached in June of 2014.
Exxon’s return on capital has fallen steadily over the past 12 years now and actually turned negative last year after having been north of 30% in 2008.
Yet if investors focus on Exxon’s share price appreciation so far in 2021, they’d think it was doing great. Shares are actually up 50% as everyone talks of “reflation” and a “rotation into value”.
But this week’s board battle at Exxon shines a light on how dire the situation really is for a lot of the oil majors.
For long-term investors who want to protect and grow their capital, and not destroy it, then oil stocks should continue to be avoided at all costs.
Exxon Mobil market capitalisation (US$ millions)
Source: Statista, Exxon Mobil
Disclaimer: ProsperUs Head of Content Tim Phillips doesn’t own shares of any companies mentioned.
Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.
He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.
In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.