The energy industry has changed rapidly over the past decade. The growth of alternatives, and their improving costs, have made them viable compared to the use of fossil fuels. Even oil is under distress thanks to the rise of electric and hybrid vehicles impacting demand.
It’s clear that fossil fuel companies need to embrace this change, and many already have. But even those with a small stake at a giant company can push through smart changes that improve sustainability and profitability.
That may be the case with ExxonMobil (XOM). Engine No. 1, a hedge fund with a mere $40 million stake in the company is looking to push for increased sustainability from the firm. The company has managed to grow into one of the largest energy names, but is still dominated by oil and natural gas.
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Chances are the company will bow to economic necessity and make some changes in its capital allocation plan towards the higher profit potential of the growing non-fossil-fuel part of the energy market.
Action to take: We like shares on a valuation basis. The weak energy market of the past year has left shares with a dividend yield near 7 percent. A shift towards more sustainable investments will likely lead to a sharp reevaluation in the markets.
For traders, we see the start of that playing out in the first half of the year. The July 2021 $47.50 calls are an at-the-money trade that can potentially offer mid-to-high double-digit returns well before expiration, especially on any jump higher in shares.