Kathy Hipple, Financial Analyst: "Exxon’s Expulsion From The Dow Jones Index Shows That Oil Is Much Less Powerful Than Before"

The beginning of the end for Big Oil? This is the question that some analysts ask themselves after the announcement on August 25 of the expulsion of the oil company ExxonMobil from the prestigious Dow Jones stock index.

Although the decision is largely due to the need to represent in the indicator the greater weight that technology companies have in the United States economy, ExxonMobil was the oldest member of this index, with a presence since 1928, and until little was considered the largest capitalization company in the world. In addition, it comes just when this country has become the world’s largest oil producer thanks to the new fracking technique, and while Donald Trump shows his unconditional support for this sector.

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For this reason, the expulsion, according to some analysts, may reflect a more general trend. “The implications of the exit from the Dow index are more symbolic than practical,” explains the financial analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), Kathy Hipple. “It is unlikely to have an effect on how ExxonMobil manages its business or its stock value, but it points to the decline in the financial outlook for the oil industry in general. The expulsion of the Dow Jones index shows that oil is much less powerful than before and that his status, influence and financial capacity are waning. “

With the exit of ExxonMobil only one oil company remains in the indicator that reflects the supposed 30 largest companies in the US stock market, the much smaller Chevron.

The reason, the specialists point out, has to do with the fact that Chevron h as had a more successful management and its shares, a more favorable trend (ExxonMobil’s securities have gone from 104 dollars in 2014 to 42 dollars in today’s market). However, it is also due to the lower weight of the sector.

“The Dow Jones Industrial Average is designed to capture the US equity market,” explains Hipple, “but ExxonMobil, as well as other large oil companies, have been declining their percentage for years. For example, in the S&P 500 index. , which includes many more companies, oil and gas represent less than 2.3% of the total market value. That is why the Dow index is increasingly difficult to justify the presence of any oil company on its list, much less that of two”.

S&P Dow Jones, the company behind the creation of the indicator, has explained that the main reason for the expulsion of ExxonMobil has been the split in Apple shares, which, given the great value that it has reached, has divided its titles to reduce its price individual. With the departure of Apple, technology companies lost weight in the list of the 30 largest companies, so they have decided to replace it with Salesforce.com, a cloud software company. The restructuring also included the pharmaceutical company Pfizer and the arms company Raytheon, which have been replaced by the biotech Amgen and the industrial company Honeywell.

However, even some large energy companies have begun to accept that crude may have reached its peak demand. The executive director of BP, Bernard Looney, confessed that the crisis in the sector due to the effects of the coronavirus was likely to last in time. “Could we have reached peak oil? Possibly, possibly. I wouldn’t rule it out,” he said in a interview recent with the financial newspaper Financial Times.

ExxonMobil, however, does not seem to doubt its model. In the last decade, the company has invested heavily in shale gas and has hardly taken any interest in the renewables sector. But for Kathy Hipple, this may be a mistake.

“These companies are having trouble coping with the energy transition we are experiencing, in which renewable energy is cheaper than oil and gas in many parts of the world. ExxonMobil does not believe that these changes mean that they have to change. But apparently Dow disagrees. “

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