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Exxon's Departure From Dow Highlights Market's Retreat From Energy Bets

08/25/2020 | 05:37pm EDT

By Karen Langley

The Dow Jones Industrial Average's coming farewell to Exxon Mobil Corp. is the latest sign of the waning influence of America's struggling energy sector.

When trading begins next week, the blue-chip benchmark will include only one energy stock: Chevron Corp., which will represent just 2.1% of the price-weighted index, according to an S&P Dow Jones Indices analysis.

In the broader S&P 500, the group isn't faring much better: Its weighting has shrunk to less than 2.5%, leaving energy as the least influential of the 11 represented industries. That is a dramatic fall from the end of 2011, when energy stocks accounted for 12% of the market, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

Although the removal from the Dow is largely symbolic -- much less money tracks the 30-stock index than follows the S&P 500 -- Exxon's departure has historical significance. The company is the longest-tenured member of the benchmark, having joined in 1928 as Standard Oil of New Jersey.

It is also a reminder of Exxon's fall from the top echelon of American industry. As recently as 2013, Exxon was the largest U.S. company with a market value above $415 billion. It has since shrunk to less than $180 billion and has been eclipsed by the technology giants such as Apple Inc., Amazon.com Inc. and Microsoft Corp. that now drive the American economy.

"Exxon, that used to be a behemoth in the U.S. markets, and now it's dropped out of the Dow," said Matt Hanna, portfolio manager at Summit Global Investments. "That just goes to show how quick things can change and how far energy has fallen as a sector."

Usually, market contrarians say a sector that is so beaten down should be ripe for bargains. But many investors remain skeptical of an energy rebound, pointing to muted expectations for global growth and spotty earnings.

Energy is by far the worst-performing S&P 500 sector this year, down 40% while the index as a whole has gained 6.6%. The underperformance is nothing new: Energy was also the weakest performer in 2018 and 2019.

The fortunes of energy stocks are closely tied to oil prices, which plunged this year when the coronavirus pandemic sapped demand for fossil fuels as producers were already struggling to manage a glut of oil and gas. U.S. crude has dropped nearly 30% in 2020 and is hovering just above $40 a barrel.

Subdued expectations for economic growth and increased interest in renewable energy have all contributed to the sector's decline.

Energy stocks are unpopular among fund managers. The net share of respondents to August's BofA Global Fund Manager Survey who were underweight energy was the most of any sector.

"It's very difficult for Exxon to really grow when you have low economic growth, muted commodity prices and we're going to be transitioning away from that main line of business into something else," said Mr. Hanna, who said his firm holds no energy stocks in its large-cap portfolio. "With the expectation that we're moving away from oil, that makes a company like Exxon or the energy complex overall just not as interesting to a lot of investors."

Exxon shares are off 41% this year, while Chevron is down 29%. The pain is even more acute among some of the oil-field services companies and shale drillers. Schlumberger has dropped 52%, and EOG Resources Inc. has fallen 47%. In fact, only one company in the S&P 500's energy sector, Cabot Oil & Gas Corp., is up for the year.

Exxon last month posted a quarterly loss for the second straight quarter for the first time in more than 20 years. The company has cut thousands of jobs and slashed its capital-spending plans to better manage its expenses during the pandemic.

Oil companies were struggling to attract investors even before the pandemic amid concerns over climate-change regulations and increasing competition from renewable energy. Exxon has sought to retain investors by paying a hefty dividend, but some analysts have questioned whether the company will be able to maintain the payout if energy demand doesn't improve.

The company played down the significance of its removal from the Dow.

"This action does not affect our business nor the long-term fundamentals that support our strategy," spokesman Casey Norton said in an email. "Our portfolio is the strongest it has been in more than two decades, and our focus remains on creating shareholder value by responsibly meeting the world's energy needs."

S&P Dow Jones Indices, which manages the 30-stock benchmark, said Monday that the changes to index were prompted by Apple's planned 4-to-1 stock split. Along with Exxon, Pfizer Inc. and Raytheon Technologies Corp. are departing the index, while Salesforce.com Inc., Honeywell International Inc. and Amgen Inc. are joining it.

Apple's stock split would have given the information-technology sector a smaller representation in the index, and the changes will help mitigate Apple's decision. The moves "help diversify the index by removing overlap between companies of similar scope and adding new types of businesses that better reflect the American economy," S&P Dow Jones Indices said.

Component stocks of the Dow are selected by the index committee, a group that includes editors of The Wall Street Journal, which is published by Dow Jones & Co., a part of News Corp.

Although Chevron has historically been smaller than Exxon, the gap in their market caps has been narrowing. It stood at about $13 billion on Tuesday and had been as slim as $4.6 billion in March, according to Dow Jones Market Data. Chevron's pending $5 billion deal to buy Noble Energy Inc., an independent oil-and-gas producer, will further narrow the divide.

In a research note Tuesday, Goldman Sachs Group Inc. analysts attributed Chevron's outperformance relative to Exxon to a stronger balance sheet and better earnings execution, among other factors.

Perhaps more important for the price-weighted Dow, Chevron's stock price is higher. It currently trades above $85 a share, while Exxon is around $40. The only companies in the index with lower share prices are Walgreens Boots Alliance Inc. and Pfizer, which is also set to be removed next week.

Chevron is in the midst of its third appearance in the Dow. It was part of the index as Standard Oil Co. of California from February 1924 to August 1925. The company rejoined in 1930, was replaced in 1999 and returned again in 2008. Both Exxon and Chevron are descendants of Standard Oil Co., which was forced to break up in 1911.

In recent years, investors have been compensated for ignoring the energy sector, said Mark Stoeckle, chief executive and senior portfolio manager at Adams Funds, which manages a natural-resources fund. But because of energy's importance to the economy, he said having some exposure makes sense.

"Nobody knows when the marketplace is going to all of a sudden begin to reward these companies," he said. "I don't think these companies are going to zero."

Write to Karen Langley at karen.langley@wsj.com


Stocks mentioned in the article
ChangeLast1st jan.
AMGEN INC. 0.49% 240.76 Delayed Quote.4.20%
APPLE INC. 1.26% 131.79 Delayed Quote.-1.91%
CABOT OIL & GAS CORPORATION -3.98% 15.91 Delayed Quote.1.78%
CHEVRON CORPORATION -2.37% 107.07 Delayed Quote.29.86%
DJ INDUSTRIAL -0.62% 33823.45 Delayed Quote.12.07%
EOG RESOURCES, INC. -3.87% 81.43 Delayed Quote.69.86%
EXXON MOBIL CORPORATION -3.29% 61.99 Delayed Quote.55.51%
HONEYWELL INTERNATIONAL INC. -1.23% 216.29 Delayed Quote.2.96%
LONDON BRENT OIL -1.02% 73.06 Delayed Quote.43.56%
MICROSOFT CORPORATION 1.37% 260.9 Delayed Quote.16.16%
NASDAQ 100 1.29% 14163.808923 Delayed Quote.8.49%
NASDAQ COMP. 0.87% 14161.350236 Delayed Quote.8.93%
NEWS CORPORATION -1.66% 25.5 Delayed Quote.44.30%
PFIZER, INC. 0.46% 39.48 Delayed Quote.6.76%
RAYTHEON TECHNOLOGIES CORPORATION -1.47% 87.13 Delayed Quote.23.66%
S&P 500 -0.04% 4221.86 Delayed Quote.12.45%
SCHLUMBERGER LIMITED -4.61% 32.47 Delayed Quote.55.93%
THE GOLDMAN SACHS GROUP, INC. -2.56% 361.5 Delayed Quote.40.68%
WALGREENS BOOTS ALLIANCE, INC. -0.94% 52.81 Delayed Quote.36.01%
WTI -0.85% 70.952 Delayed Quote.50.22%
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