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Most investors would be happy to more than double their money in an investment in less than three years’ time. If it were easy to do this, however, everyone would be. That said, those that bought ExxonMobil (XOM 1.21%) in April 2020 have seen a massive stock gain. Here’s why so many people overlooked the opportunity.
A $10,000 investment in energy giant Exxon’s stock at the start of April 2020 would be worth around $28,000 today. In percentage terms, the shares have risen more than 180%. It’s just the start of 2023, so the holding period here is a few months shy of three years. If you look past the meteoric meme stock price rises of recent years (which have largely proven to be unsustainable), that kind of gain in just three years is simply incredible!
Image source: Getty Images.
Stepping in to buy in April 2020, however, would have required almost Herculean strength, and certainly an emotional fortitude that most investors lack. That’s because April was just about the worst point of the coronavirus pandemic-driven bear market. It seems like a lifetime ago now, but countries around the world were effectively shutting down their economies in an effort to slow the spread of what was, at the time, a novel illness with no effective treatments.
Demand for oil and natural gas fell dramatically and pushed energy prices sharply lower. At one point West Texas Intermediate (WTI) crude, a key U.S. energy benchmark, fell below zero. This was a brief moment in time, but think about what a negative price means in the energy sector — oil drillers were basically paying customers to take oil off their hands. Investing in an energy company, even one as well known as Exxon, when the energy market was facing such a serious headwind would not have been easy.
Here’s the thing, though, oil and natural gas are notoriously cyclical commodities. The 2020 price plunge was, perhaps, shocking for unique reasons, but it wasn’t actually far off cyclical trends. Simply put, swift and dramatic price moves are the norm, not the exception, in the energy sector. With an investment-grade-rated balance sheet, Exxon was probably one of the energy industry companies best positioned to withstand the blow.
That’s not an accident. Exxon, which has been around in some form for more than 100 years, has seen tough cycles before. And it is ready, which it again proved in 2020. One key indication of this is the fact that Exxon has increased its dividend for 40 consecutive years despite the inherent industry ups and downs it has to deal with. The story, again, goes back to the company’s balance sheet.
XOM Financial Debt to Equity (Quarterly) data by YCharts
Just prior to the pandemic, Exxon’s debt-to-equity ratio was well below 0.20 times. That’s a very modest figure for any company. However, when the pandemic hit and energy prices plunged, management followed a tried and true playbook. It took on debt, more than doubling its debt-to-equity ratio. Even at the peak level, Exxon’s leverage wasn’t overbearing, but it did rise very quickly. The cash raised allowed the company to continue to pay its dividend and support its business, including the capital spending needed to support long-term production levels.
XOM Total Long Term Debt (Quarterly) data by YCharts
Fast forward to today. Exxon’s debt-to-equity ratio is again well below 0.20 times. That’s because oil prices have rebounded strongly from their lows. Exxon’s stock price has rebounded along with energy prices, as have its profits. And it is using today’s profits to pay down the debt it took on to help it muddle through the industry downturn.
If the only thing you see is the huge price gain that Exxon’s stock has experienced since April 2020, you are missing the real story. Exxon did what it always does during the hard times; it used its balance sheet as a shield to protect itself and income investors. If you had known this was simply the same old successful playbook being used again, you might have had the fortitude to take a contrarian stance.
In the end, buying Exxon’s stock while Wall Street was busy throwing the baby out with the bathwater (again) proved to be a huge financial win for investors who took the time to understand history.
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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