Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / Why Exxon's 4.6 Percent Slide Is a Contrarian Entry Point
Transcript
- Lucas: So Exxon is down four point six percent over the past five sessions, and it's not because of anything the company said. No earnings miss, no guidance cut, no scandal. It's just... drifting, while the S&P 500 is up nearly a percent. That disconnect is exactly the kind of thing that gets my attention. Luna: A four and a half percent drop in a week on no company-specific news feels like the market is making a broader point about energy demand or oil prices. Do we know what's driving it? Lucas: Right, and the usual suspects are there—a tick down in crude, some chatter about Chinese demand slowing, and a bit of profit-taking after oil stocks had a strong first half. But the interesting thing is, Exxon's fundamentals haven't moved. In fact, if anything, the balance sheet is in the best shape it's been in years. Luna: So you're saying this could be a classic contrarian setup—a quality company on sale for no fundamental reason. But isn't that also how people get burned, buying a falling knife? Lucas: Absolutely, and that's the tension. I mean, look at Chevron—it's down three percent this week too. So it's not an Exxon-specific problem, it's a sector-wide wobble. But the way I think about it is, you don't buy a stock just because it's down. You buy it when the decline is out of proportion to the underlying business. Luna: So what's the underlying business look like for Exxon right now? Give me a couple of numbers that make you think this is more than just cheap oil. Lucas: Sure. So Exxon's dividend yield is now around three and a half percent, and the payout is covered about two times by free cash flow. They're also buying back stock at a pace that's been over ten billion dollars a quarter recently. That's a company that's returning a lot of capital to shareholders even while the share price is sliding. Luna: And they've been doing that consistently for years, too. I remember you mentioning in an earlier episode how the big oil majors have transformed their capital discipline since the pandemic. Seems like Exxon is a poster child for that. Lucas: Exactly. And that's the key thing that separates this from, say, a 2014 situation where oil companies were spending every dollar they had on growth. Today, Exxon is generating more than enough cash to fund its projects, pay the dividend, and still buy back stock. The stock is down four and a half percent, but the business is arguably more resilient than it's ever been. Luna: So if that's the case, why is the market selling? Is it just the oil price, or is there something else in the headlines that we should be thinking about? Lucas: I think there are two things. One is the macro story: the Kansas City Fed president said inflation is stubborn and sticky, which means rates might stay higher for longer. That's a headwind for all value stocks, including energy. But the second thing is the AI electricity narrative. Everyone wants to own the companies that will power data centers, and that has pulled some money into names like Constellation or even uranium miners, while old-school oil gets ignored. Luna: So you're saying the market is rewarding the ai power story and punishing the traditional hydrocarbon story, even though Exxon is actually essential to the global economy right now. That feels like a mispricing. Lucas: Potentially. And that's why I'm not just looking at the price drop—I'm looking at the valuation. Exxon is trading at around thirteen times forward earnings, which is below its five-year average. And when you factor in the buyback yield of about four percent, the total shareholder yield is close to seven percent. That's a pretty compelling combination. Luna: Seven percent total yield, and you get the optionality of oil prices if they recover. But I want to push back a little—what's the bear case? Why might this be a value trap? Lucas: The bear case is that oil demand has peaked, or at least that the world is moving faster than we think toward electrification. If that's true, then Exxon's reserves become less valuable over time, and the market is right to discount them. But that's a long-term thesis, and in the meantime, you're getting paid a growing dividend and a big buyback. Luna: So it's a 'show me' situation. You need to believe the cash flow is real and sustainable, and then the price drop just makes it cheaper. I'm starting to see the contrarian appeal. Lucas: And that's the thing—it's not about predicting the next move in oil. It's about whether the company can keep generating cash at a level that supports the dividend and buyback. Exxon's break-even price is around forty dollars a barrel, and Brent is in the seventies. So even if oil drops another ten dollars, they're still covering the dividend. Luna: That's a wide margin of safety. And on that note, I'm curious—how does this tie into the broader market? The S&P 500 is at nearly seventy-seven hundred, and it's driven by a handful of AI megacaps. Exxon is not in that club. Is that part of the reason investors are overlooking it? Lucas: I think that's a big part of it. The market is narrow. Nvidia is up six point eight percent this week alone, and the whole tech complex is ripping. Meanwhile, energy is down, and small caps are basically flat. So there's a rotation happening, but it's not toward value—it's toward growth and AI. That can create opportunities in the laggards. Luna: So the contrarian play is to buy what's out of favor, as long as you have a reason to believe the business is still good. And Exxon fits that bill. But I'd love to hear a concrete checklist—what do you look for before buying a stock that's down five percent on no news? Lucas: I'd start with the dividend: is it covered by free cash flow, and has it grown over time? Then I'd look at the balance sheet—debt to equity, liquidity, that sort of thing. Then I'd check if the company is buying back stock, and at what valuation. And finally, I'd ask if there's a catalyst that could change the narrative, like an oil price recovery or a new project coming online. Exxon checks all those boxes. Luna: And the catalyst part—what could turn the narrative around for Exxon? I imagine it's not just oil prices. Lucas: Right, oil prices are one, but also the AI data-center demand story could actually help Exxon. I mean, those data centers need electricity, and natural gas is a big source of power. Exxon is one of the largest natural gas producers in the world. So there's a subtle way that AI demand could eventually lift the whole energy patch. Luna: That's a nice way to connect the two narratives. So you're not betting against AI, you're betting that the energy needed to power it gets repriced. And Exxon is a play on that. Lucas: Exactly. And that's the kind of thinking that separates a stock picker from a momentum chaser. You're not trying to catch the hottest trend—you're trying to buy a solid business at a price that gives you a margin of safety. And right now, the market is offering that for Exxon. Luna: So before we wrap up this thought, I want to bring up something we've talked about on the show before—how we keep this podcast ad-free, and how that's possible because of our listeners. If you're finding these stock-picking conversations useful, and you want to support the work we do, there's a link on our show notes. It's buy me a coffee dot com slash fexingo. Lucas: Yeah, and that support is what lets us keep digging into these contrarian angles without worrying about pleasing advertisers. Every little bit helps, and we appreciate anyone who chooses to contribute. Luna: Definitely. So back to the checklist—if someone was listening and wanted to apply this to their own portfolio, what's the one takeaway you'd leave them with? Lucas: I'd say, don't be afraid of a stock that's down if the business is actually getting stronger. Do the work to understand the cash flow and the dividend cover, and then trust the margin of safety. That's how you find opportunities in a market that's obsessed with the next big thing. Luna: And that's a good note to end on. Thanks for joining us, and we'll be back tomorrow with another stock-picking deep dive. Lucas: Take care, everyone.