Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / The Case for Energy Stocks After a Brutal Selloff
Transcript
- Lucas: So energy stocks just had one of their worst weeks in months. Exxon Mobil down seven point eight percent in five days, Chevron off six point four percent. This is happening while the S&P 500 is up over two percent and small caps are ripping higher by more than six. Luna: Yeah, that divergence is pretty striking. And it's not like oil prices are collapsing. Brent crude is still above ninety dollars a barrel. Lucas: Right, that's what makes it interesting. The macro backdrop for oil is actually pretty constructive. You've got the Strait of Hormuz issue — Piper Sandler came out Tuesday and said they expect it to remain closed for months, which would push oil to new highs. Meanwhile, China just reported industrial profits jumped twenty-four point seven percent in April, the fastest gain in over two years. Luna: So demand from the world's biggest oil importer is accelerating, supply routes are threatened, and yet the big US oil names are getting sold off hard. What gives? Lucas: I think the market is pricing in something more nuanced than just oil at a certain price. There's a concern that if oil stays elevated or goes higher, it could hurt global demand over time. And there might be some profit-taking after energy was one of the best sectors this year through April. Luna: But for a stock picker, isn't this exactly the kind of dislocation that creates opportunity? I mean, if the thesis hasn't changed, you're getting a better entry price. Lucas: That's the question. Let me lay out the case for Exxon specifically, because I think it's the cleaner example. Exxon trades at roughly thirteen times forward earnings, and its free cash flow yield — even with oil at current levels — is around eight percent. That's a pretty solid margin of safety. Luna: And they have a strong balance sheet and a dividend that's been growing. The current yield is about three and a half percent, which is decent for a company that's also buying back shares. Lucas: Exactly. The dividend is well covered. In the first quarter, Exxon generated enough free cash flow to cover the dividend more than two times over. So the payout isn't at risk unless oil crashes to forty dollars or something. The selloff we're seeing now is more about sentiment than fundamentals. Luna: But sentiment can persist. I mean, Chevron's chart looks similar. They're down six and a half percent this week. And Chevron has been dealing with some operational issues, like the project delays in Kazakhstan and the Permian production growth slowing. Lucas: That's fair. Chevron's story has more company-specific noise. But Exxon has been executing really well. They grew production in the Permian by double digits last year, and their cost structure is among the best in the industry. Their breakeven price for new projects is around forty dollars a barrel Brent. Luna: So when you see a stock drop eight percent in a week on no company-specific bad news, it starts to look like a gift for long-term investors. Lucas: That's the value investor's mantra. But I want to push back on myself a little. The energy sector has a history of being a value trap. You buy the dip, the dip keeps dipping, and eventually the dividend gets cut or the company does a dilutive acquisition. Luna: Right, that's the classic fear. And we saw it in 2014 and 2020. But this cycle feels different because capital discipline has been the dominant theme. The majors aren't chasing production growth at any cost anymore. They're returning cash to shareholders. Lucas: That's true. Exxon's capital spending this year is around twenty-three billion dollars, which is roughly the same as last year. They're not ramping up. Meanwhile, they're buying back about twenty billion dollars worth of stock annually. So the net cash return to shareholders is substantial. Luna: And the Straits of Hormuz risk isn't going away anytime soon. If anything, it could escalate. Piper Sandler's call for months of closure is a big deal. That would likely push oil above one hundred dollars. Lucas: If that happens, Exxon's free cash flow could explode higher. But the market is essentially ignoring that tailwind right now. It's focused on near-term macro fears — maybe a global slowdown, maybe trade tensions. But for a stock picker, buying when the market is myopic is often the right move. Luna: So what's the concrete number you're watching? If someone wanted to consider Exxon here, what's the key metric? Lucas: I'd look at the free cash flow yield relative to the ten-year Treasury. Right now, Exxon's free cash flow yield is around eight percent, while the ten-year is yielding about four point three percent. So you're getting almost double the yield from a company with pricing power and a strong balance sheet. That's a compelling risk premium. Luna: And if you think oil stays above seventy dollars, that free cash flow yield only goes higher. The downside is protected by the dividend and buyback. Lucas: Exactly. But I'd also note that this isn't a trade for next week. This is a position you'd build over time, maybe averaging in. The volatility could continue. But if your time horizon is three to five years, this selloff is probably an opportunity. Luna: It reminds me of the conversation we had about Berkshire building its Chubb position. They bought insurance at a time when no one was excited about it. Sometimes the best buys are the ones that feel uncomfortable. Lucas: Totally. And look, if today's episode helped you think about energy stocks or portfolio construction differently, we put a lot of work into making this show independent and ad-free. If it was worth a coffee to you, you can find us at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. Luna: Even a small contribution helps us keep doing deep dives like this one. We really appreciate it. Lucas: So back to Exxon — one more thing I want to mention. The stock is down, but the company is actually increasing its dividend. They just raised it by four percent in April. That's a signal that management sees the cash flow as sustainable. Luna: That's a strong signal, especially in a volatile environment. And it's worth noting that Chevron also raised its dividend, though by a smaller amount. Lucas: So the question for listeners is: do you have the conviction to buy when the crowd is selling? That's really what stock picking comes down to. The data supports the thesis, but the price action says wait. And usually, the best returns go to those who act when waiting feels safest. Luna: Well said. And we'll keep watching the oil headlines this week, especially with the Strait of Hormuz situation. That could be a catalyst one way or the other. Lucas: Absolutely. Next time we'll dig into another sector that's showing divergence. Until then, happy researching.