After nearly 150 years, the Rockefellers divest from Exxon Mobil

After nearly 150 years, the Rockefellers divest from Exxon Mobil

The move to divest from fossil fuels has gained significant momentum in just the past few years. What started out as a small movement has turned into an undeniable nationwide force. Even large investors at the institutional level, including pension funds and endowments, are selling their investments in energy companies.

The movement gained even more strength when the Rockefeller family—the original founders of Exxon Mobil (NYSE: XOM)—announced they had officially sold their remaining investment in the oil giant. This was huge news, and represents a watershed moment in the renewable energy movement.

A brief history

Standard Oil could be considered the “founding father” of American oil as we know it. It was founded all the way back in 1870 by John D. Rockefeller. The company began as a partnership between John D. Rockefeller and his brother William. What started out as a simple two-man operation turned into one of the most powerful companies to ever exist.

The Rockefellers were extremely shrewd businessmen who had a laser-like focus over cost control. In their view, the surest path to dominance in the oil business, which at that time was akin to the Wild West, was through innovation in drilling techniques as a differentiator. This set Standard Oil apart from the pack. Their advances in horizontal and vertical integration allowed for streamlined production, superior logistics, and the ability to under-cut the competition.

The company grew so quickly, and annihilated its competition with so much ferocity, that in 1911 it was dissolved by the U.S. Supreme Court. Standard Oil was broken up on antitrust grounds, into 33 smaller companies—including the modern-day Exxon Mobil and Chevron (NYSE: CVX)—cementing the Rockefeller family legacy. The scope of the breakup is truly shocking. Just these two companies, Exxon Mobil and Chevron, cumulatively generate annual revenue in excess of $388 billion and combined have a $519 billion market capitalization.

It is not inconceivable that, if the original Standard Oil was not broken up, instead left intact, it could be worth in excess of $1 trillion today.

Why this matters so much

It is true that the Rockefellers only had a relatively small portion of their wealth still tied up in Exxon Mobil stock. But the fact that the founding family of the largest publicly-traded oil company in the world no longer holds any shares—directly because of the company’s impact on the environment and its contribution to climate change—speaks volumes.

The Rockefeller Family Fund, which oversees roughly $130 million in its endowment, said it would divest from fossil fuel investing as soon as possible. It went so far as to add that Exxon Mobil, the company its family founded, misled the public about the risks of climate change. In addition to divesting from Exxon Mobil, the fund will also divest from coal and Canadian Oil Sands investments. According to a statement, the Rockefeller Family Fund believes “there is no sane rationale for companies to continue to explore for new sources of hydrocarbons” given that climate change itself threatens the very viability of the human race.

Analysts have begun to take note of the divestment trend. Both Exxon Mobil and Chevron have been downgraded recently. The average analyst price target for Exxon Mobil is $81.11, which is actually 2.5 percent lower than its Apr. 8 closing price. Analysts have significantly reduced their ratings on Exxon Mobil in recent weeks. It was downgraded on Jan. 16, by Tudor Pickering, to sell—the lowest analyst rating possible. It was also initiated with a ‘reduce’ rating by Nomura analysts on Mar. 18. Separately, the most recent analyst move for Chevron was a Mar. 22 downgrade by Raymond James analysts, to Market Perform from Outperform.

How to follow the Rockefeller’s lead

For every day investors, there is a way to follow in the Rockefellers’ footsteps. There are many publicly-traded companies engaged in clean energy production, which are now viable economically. No longer do investors have to choose between their heads and their hearts. One suitable alternative to fossil-fuel investing is First Solar (Nasdaq: FSLR). First Solar designs, produces, and sells solar modules, which convert sunlight into electricity. It also develops, designs, and sells solar power solutions. It offers its products and services for residential, commercial and industrial applications.

As recently as 2012, First Solar was consistently losing money. But it has dramatically improved its profitability in just a few years’ time.

It has turned a profit based largely on cost controls, thanks to the economies of scale. As it has expanded its production, the company has achieved significant cost deflation, which has allowed it to generate positive earnings. Last year, First Solar generated record sales of $3.4 billion. Thanks to efficiency improvements, earnings per share soared 37 percent in 2015.

Going forward, First Solar should have another great year in store. The company ended last year with record bookings, a strong indication of future demand. Management expects another 14 percent revenue growth this year at the midpoint of its forecast. Analysts largely concur with this forecast. The average analyst estimate calls for 10 percent sales growth this year.

The stock is still attractively priced. Shares trade for 11 times trailing earnings and 16 times forward EPS estimates. By comparison, the S&P 500 Index is valued at approximately 21 times earnings. It seems the market still doubts the viability of solar as an investment, but if the company continues to rack up record sales, the stock may not stay this cheap for long.

Companies to watch:

SolarCity (Nasdaq: SCTY) Another major solar company is Solar City. SolarCity shares have picked up momentum in recent weeks—the stock is up 11 percent in the past one month alone. And, analysts believe there is plenty of upside potential left. The median price target for SolarCity stock is $40 per share, which represents 42 percent upside from its Apr. 8 closing price.

SunPower Corporation (Nasdaq: SPWR): SunPower has done an excellent job improving its financial performance. It is now solidly profitable—the company earned $337 million in adjusted net profit last year. Its earnings per share are expected to decline this year, but then resume growing in 2017 at a very healthy 36 percent rate.

Bob Ciura is an independent equity analyst. Since 2012, his work has focused on fundamental investment analysis of publicly-traded companies in the energy, technology, and consumer goods industries. Bob has a Bachelor's degree in Finance and an MBA in Finance.  

 

Originally published on April 26, 2016