Raymond James: Higher Oil Prices Are Bad News For Exxon Investors

This year has been another disappointing one for Exxon Mobil Corporation XOM investors, and one Wall Street analyst said a major jump in oil prices could mean more of the same for Exxon in 2019.

The Analyst

Raymond James analyst Pavel Molchanov reiterated an Underperform rating on Exxon. 

The Thesis

Oil prices are in the process of reaching new cyclical highs in late 2019 and 2020, Molchanov said in a Tuesday note. (See his track record here.) 

Raymond James is now forecasting WTI prices of $75/bbl by the fourth quarter of 2019, and Molchanov said Exxon is not well-positioned for major swings in oil prices.

“A look-back at nearly two decades of history provides ample evidence that XOM shares are set to lag far behind the energy sector benchmark under the oil price scenario that we envision over the next 12 months."

In the nine instances in which oil prices have rallied at least 45 percent in a one-year period since 2000, Exxon has underperformed its peers in seven of those scenarios. 

Exxon’s relative underperformance during rallies in oil prices may seem counterintuitive, since higher oil prices are theoretically good for margins. Yet Molchanov said Exxon’s size and stability make investors view it as a defensive energy play. Therefore, it tends to be a flight-to-safety buy during periods of oil price weakness and a source of funds for investors during times of oil price gains.

When oil prices are rising, traders tend to dump Exxon stock and buy other oil stocks with a higher beta, leading Exxon shares to underperform, the analyst said. 

The most recent period of major oil price gains was no exception: WTI prices rallied 50 percent from August 2016 to January 2018, but Exxon stock was down 2 percent during the stretch.

Price Action

Exxon was down 0.37 percent at $76.26 at the time of publication Tuesday and remains down 7.5 percent overall in 2018.

Related Links:

The Election's Impact On Energy, Fracking

Oil Rebounds As OPEC Agrees On Bigger-Than-Expected Cut