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How ExxonMobil's share price is fending off short sellers

As the world’s largest publicly traded energy company with a market cap of $324bn, ExxonMobil [XOM] is a regular target for criticism. For the past few years, the oil incumbent has been caught up in multiple legal battles. The details of each case may vary, but the broad theme is the same: to make oil and gas producers cover the cost of adapting to the effects of climate change. So how has the company's share price fared? 
 
Despite Exxon’s solid track record of giving investors generous returns, growing attention from activist shareholders has become a downside risk to the company with most analysts suggesting a ‘hold’ rating on the share price, according to Reuters.   
 
Indeed, the company doesn’t look in good financial health. Its most recent first quarter results revealing a 50% fall in profits from a year ago; the share price sunk to a YTD low of $70.77 on 31 May. And given that crude oil prices are subject to volatility amid the ongoing US-China trade conflict, shares in Exxon are exposed to short-term gains and abrupt sell-offs.  
 
However, declining short interest in the company’s share price in the last couple of months, could be an indication that investor sentiment is improving. While short sellers have retracted recently – with interest falling from 0.93% in April to 0.81% in May – XOM shares have declined by 12.41% during the same period, suggesting that investors could be expecting a rise in its second quarter earnings on 2 August.
 
 
 
Fossil fuels on trial 
 
In an effort to impose penalties on oil incumbents to cover the cost of adapting to the effects of climate change, a growing number of cities and counties in the US have filed legal cases over the last two years, seeking damages from companies such as BP [BP], Royal Dutch Shell [RDSA] and Chevron [CVX]
 
The most recent case was brought by Exxon shareholder Sarah Von Colditz, who filed a lawsuit against the oil giant on 2 May for misleading investors on how much risk climate change poses to the company’s assets. 
 
Since 24 October 2018, Exxon has also been locked in a legal battle with New York state Attorney General Barbara Underwood over a “longstanding fraudulent scheme”, which has proved a drag on the company’s share price, the stock down around 5%, wiping $4.29bn off its market value, in that time. 
 
The battle between Exxon and New York is the culmination of a three-year investigation into the company, originally brought to determine if it was intentionally hiding evidence of the impact fossil fuels have on climate change. The case against Exxon claims it deceived investors by hiding the true extent of its financial exposure to regulations aimed at curbing greenhouse gas emissions.
 

$4.29bn

Value wiped from ExxonMobil's share price since 24 October

In another lawsuit against the company the US Supreme Court rejected an appeal by Exxon against a ruling for it to turn over internal documents to the Massachusetts attorney general Maura Healey. The State of Massachusetts filed its suit against the oil company in April 2016, claiming it misled consumers and investors about the impact of fossil fuels on climate change. 
 
It doesn’t look like the legal battles will ease up anytime soon either. On 17 June a campaign, backed by more than 80 investors representing $10tn in assets, launched to target hundreds of companies, including Exxon, in a bid to encourage better reporting of their carbon emissions.
 
 
Stock outperforms energy sector, underperforms oil sector 
 
Amid the slew of legal battles, ExxonMobil’s share price performance has matched gains in the Energy Select Sector SPDR fund [XLE] over the last six months, rising 14% to $77.69 in the six months ending 21 June compared to the fund’s 13% uptick during the same time. 
 
For Zacks’ Mark Vickery, the strong performance is due to its size and diverse asset base, which has “allowed ExxonMobil to reward stockholders with a 6.2% average annual dividend hike over the past 37 years”, he wrote on Zacks. 
 
 
Market cap$320.95bn
PE ratio (TTM)17.47
EPS (TTM)4.34
Quarterly Earnings Growth (YoY)-49.50%
ExxonMobil share price vitals, Yahoo finance, 03 July 2019
 
 
The company distributed $3.5bn in dividends to shareholders during its first quarter of 2019, giving it a stable dividend yield of 3.77% – which sits directly in the middle of the industry’s 2.42% and the sector’s 2.41% averages, according to Reuters. 
 
However, when it comes to the oil industry, the company’s share price underperforms the largest ETF for crude, the United States Oil fund [USO], which is up 25% during the same period of time.
 

$3.5bn

Value of dividends distributed to shareholders during the company's Q1 of 2019

 

Exxon CEO marks turning point in its climate stance 

It was under Lee Raymond’s time at the helm, between 1993 and 2006, that the company vehemently denied the effects of greenhouse gases. However, when Rex Tillerson took over as CEO in 2006, it moved away from rejecting the weight of scientific evidence on climate change and started using a proxy cost of carbon to help model the potential impacts of future climate policies.  
 
The company has come a long way since then. The current chairman and chief executive of Exxon since 2017, Darren Woods, is in agreement with activist shareholders that it needs to address the threat of climate change. 
 
“The world needs additional solutions, and that’s where we think we can add significant value,” he told shareholders at the annual meeting on 29 May. “We are doing our part to address society’s dual challenge” of providing affordable energy while reducing environmental impacts.

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