ExxonMobil exits after 100-year run at Dow; what it means for investors

Come Monday, August 31, ExxonMobil is going to end its nearly 100-year run as the longest-serving component of the Dow Jones Industrial Average (DJIA).

The energy giant will be replaced by cloud leader Salesforce, driven by Apple's decision to split its stock, according to S&P Dow Jones Indices, which is responsible for Dow.

The shakeup announced on August 25 is the largest change to the 30-stock benchmark in seven years with the addition of three new companies: Salesforce.com (which will replace ExxonMobil), Honeywell International (which will replace Raytheon Technologies), and Amgen (which will replace Pfizer).

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Since making its debut in 1928, ExxonMobil has been the longest member of DJIA. The company has been a mainstay in market indexes and a staple holding for investors. Its removal from Dow is another red scare in a series of headwinds that have pressured its shares down over 40 per cent for the year. The iconic blue-chip stock's drop from the influential index reflects just how the once-dominant Exxon has dwindled.

The fall of ExxonMobil goes back to 2007 when it was the largest company by market capitalisation, when limited supply and increasing demand led to high oil prices that in turn pole-vaulted its profits and revenues record heights.

The 2008 recession further exacerbated the situation impacting the oil and gas sector immensely, and leading to a stark dip in oil and gas prices coupled with a contraction in credit.

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From the monthly average for WTI crude (West Texas Intermediate) logging the highs of $133.88 per barrel in June 2008 to dipping as low as $41.12 a barrel, oil endured immense volatility. However, after a brief reversal, oil prices skyrocketed over $90 a barrel between 2010-14 but, following 2015's oil crash, they never recovered, and neither have Exxon's revenues.

To add to the din, oil companies that were struggling on the stock market in the wake of climate concerns, and Silicon Valley (tech) stocks outdoing petroleum (stocks), the coronavirus pandemic has only compounded their problems keeping global oil demand well below expectations.

The energy sector now makes up a mere 2.5 per cent of the S&P 500, as against 6.84 per cent five years ago, and 10.89 per cent 10 years ago, whereas technology has leapt 28.17 per cent (presently) from 18.48 per cent of the index in 2010.

Tech stocks such as Apple, Facebook, Microsoft, Alphabet, and Amazon, individually, outweigh the entire US energy sector.

The reason why Exxon's stock has plunged is for more than the simple fact that oil has fallen out of favour by investors. The company is not earning as much as it used during its golden run between 2005 and 2015.

Furthermore, its debt burden is ballooning coupled with the free cash flow (FCF) being in the red due to the COVID-19 pandemic's impact on oil and gas prices as well as demand.