NEW YORK (TheStreet) -- Energy behemoth Exxon Mobil (XOM) desperately needs new ways to boost earnings and offset slowing production. Cash flows are down with energy prices, so relying on dividend growth to boost shareholder value may not cut it anymore for some investors.
The company reports quarterly results Friday. Shares, around $95, are down over 6% for the year to date.
Bellwethers play offense but should also play defense. Exxon's offense has been questionable and a case can be made the company has been largely on the defensive for a considerable amount of time, even when oil prices were above $100 per barrel.
Catching a falling a knife is not effective strategy. So while there are rumors Exxon could be interested in acquiring Anadarko Petroleum (APC) and SandRidge Energy (SD) , the company may be better off focusing on innovative technologies that can boost efficiency. That could make Flotek (FTK) a name to keep on your radar.
Perhaps the sheer illusion that oil prices would levitate forever masked what really has been plaguing this company: Exxon is a shaky long-term investment.
The company has a declining production profile, a lower number of planned stock buybacks and a 2.9% dividend that pales by comparison with Chevron's (CVX) 3.7% dividend yield, among the best in the energy sector. These dents in Exxon's armor, amplifies those who believe the company's 2009 takeover of XTO Energy for over $41 billion was really the single largest futures bet in commodity history.
The problem for XOM is, thanks to weak natural gas prices, it has been on the wrong side of that trade.
For Exxon, the strategy to enter geopolitically unstable regions more aggressively to seek bigger financial rewards in recent years has likely been motivated by the need to offset what management cited two years ago as losing its shirt amid a glut of gas in North America thanks to hydraulic fracturing, or fracking. This is making Exxon stock much more risky for investors than one would typically think, especially since gas prices have still not recovered.
Massive geographic exposure to Russia is a concern that's hard to ignore. Exxon, through its Neftegas subsidiary, operates and owns 30% of one of the largest foreign direct investment projects in Russia (the upstream Sakhalin-1 in Far East Russia). Also, the Kashagan project, a project in which Exxon owns a 18% stake just outside the Russian Federation, was expected to eclipse the 1.5 millions barrels of oil per day that all of the company's subsidiaries generated last year. That project may be further pushed back thanks to the selloff in crude oil.
Want more? Let's not forget earlier this year Exxon announced a new joint venture with Rosneft to explore for a massive oil find in the Arctic Ocean and drill horizontal wells in western Siberia, something that could be delayed if there are further sanctions against Russia.
In addition, while most people would acknowledge the golden age for refining is over, it's puzzling why Exxon would recently agree to spend $1 billion to update its Antwerp European refinery at a time when refiners like Valero (VLO) and Tesoro (TSO) are devoting more focus on advanced biofuels. If you do a search for biofuels on the Exxon Web site you get exactly one result, text from a keynote speech delivered by Rex Tillerson in 2009.
Weaker oil and gas prices thanks to the shale revolution and growth in renewable energy sources has made fossil fuels less expensive. If the pricing trend is now lower, acquiring new assets and production could only make XOM even more susceptible down the road to assets with declining value.
At the end of the day, Exxon has plenty of muscle, but even the best athletes need to hit the gym to stay fit. Relying on old ways won't do the job. Management must address the company's future when it reports third-quarter earnings Friday.
Company representatives did not respond to requests for comment on this story Wednesday.
At the time of publication, the author had no positions in stocks mentioned.
This article is by an outside contributor, separate from TheStreet's news coverage.
Correction: This story was changed from an earlier version to clarify that Chevron's dividend yield of 3.7% is among the best in the energy sector. ConocoPhillips (COP) has a dividend yield of 4.2%, BP's (BP) is 5.5% and Total's (TOT) is 5.7%.
TheStreet Ratings team rates EXXON MOBIL CORP as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:
"We rate EXXON MOBIL CORP (XOM) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, increase in stock price during the past year, attractive valuation levels, good cash flow from operations and increase in net income. We feel these strengths outweigh the fact that the company shows low profit margins."
You can view the full analysis from the report here: XOM Ratings Report