Source: PaxForex Premium Analytics Portal, Fundamental Insight

Without a doubt, 2020 was a pretty challenging year for energy businesses, and even the biggest names in the industry felt the brunt of it. But the oil market has begun to stabilize, and stocks like ExxonMobil have regained some of their lost ground. Still posting historically high returns of 6.1%, is this integrated energy giant worthy of investor attention today? Here are some aspects to consider before making a decision.

One of the biggest risks to Exxon's future is the continuous global transition to low-carbon energy sources. The big fear is that oil and natural gas will go out of business so quickly that Exxon will be left with energy assets that have little or no value. It is not an unreasonable concern, but time is of the essence. 

Exxon noted that energy transitions take ages, with the transition from coal to oil taking about 100 years. In other words, as the world transitions to technologies such as solar and wind power, it could be a very long time until oil and natural gas are out of the picture. And because wells have a limited lifespan, reduction implies that more drilling will be required in the coming years.

That's why Exxon has largely decided to stick with oil and natural gas and not follow its European counterparts in building a renewable energy business. Exxon's approach doesn't please Wall Street today, and while it doesn't fit the modern worldview, it's not weird. If you are different, you might like the approach this energy giant is taking. 

Still, with a market capitalization of about $240 billion, Exxon is one of a small number of very, very large integrated energy companies. That makes it something of a target for those who want to flip the industry. For instance, New York State recently lost a case prosecuting Exxon and a handful of other big industrialists responsible for global warming damage. But that's just one example; there are many others. And even if Exxon wins every single court case or public relations battle, these efforts come at a cost.

In other words, even if the oil is needed for years to come, and Exxon is happy to provide it, the company is still likely to face a lot of public scrutinies. It would probably hurt Wall Street's view of the stock.  

Another problem is that drilling oil and gas wells is a capital-intensive process. And because the products Exxon produces are raw materials, its top and bottom lines can, and indeed do, vary considerably from year to year. That difference is often quite significant, noting that in 2020 it lost $22 billion and its operating cash flow was $15.7 billion, down less than 50 percent from the previous year. Meanwhile, the company's capital investment, even after spending cuts, was about $21 billion. On top of that, Exxon paid a $14.9 billion dividend and continues to maintain quarterly payments.    

It couldn't cover dividends and capital expenditures out of cash flow, so the company's total debt increased 44% in 2020. Looking back in 2019, the company's total debt increased by nearly 80%, suggesting that the trend of leverage was here even before the coronavirus pandemic. To be fair, net debt (including cash) to equity is about 28%, which is hardly unreasonable. But given the need for investment in the industry and the increasing debt load, this is an issue investors should keep an eye on.   

While it has already been noted, it is important to keep in mind that the core of Exxon's business is built around commodity products. That means it has little control over its top line. And if costs are under the company's control, the business is inherently capital-intensive. So Exxon is always on a tightrope trying to balance revenues and costs. When oil prices are extremely high, it's an easy effort, but when they're low, it takes a lot more agility.

It is exactly what is hard to predict, as the recent decline in capital investment throughout the energy sector could cause prices to rise down the line. That would solve a lot of problems, allowing Exxon to pay down debt while continuing to invest for the future and rewarding investors with big dividends. Alternatively, a switch to clean energy could reduce demand and keep the price range within a range, meaning Exxon would have to be very careful with its spending and potentially rely even more on its balance sheet to fund it. Dividends in this scenario will become increasingly risky.

Exxon is commonly being recognized as a well-run oil company, although it does not fit into the clean energy theme that is becoming more influential on Wall Street. Even though after a disastrous year for the oil industry, Exxon is not taking any outlandish stance on the future-just one that people don't like. Still, there are very real risks, given that the company spends more than it gets from its business and increasingly relies on debt to fund capital expenditures and pay dividends.

With a high yield of 6.2%, some investors may find this attractive, believing they are being paid for the extra risk. That's a fair view, but the key is to be guided by the company's view of the long-term outlook for the oil industry. If you don't, Exxon is not what you need today.

While the price is below 58.80, follow the recommendations below:

• Time frame: D1
• Recommendation: short position
• Entry point: 55.87
• Take Profit 1: 52.00
• Take Profit 2: 50.20

Alternative scenario:

If the level 58.80 is broken-out, follow the recommendations below:

• Time frame: D1
• Recommendation: long position
• Entry point: 58.80 
• Take Profit 1: 61.90
• Take Profit 2: 63.70