The recent rout and volatility in oil prices have highlighted business model vulnerabilities throughout the energy industry, punishing the stock prices of many companies, including large integrated oil companies like Exxon. Although oil is still the main source of energy generation in the world, its leadership and prowess has been challenged with the steep decline in the cost and greater innovation in alternative energy. The long-term performance of the Energy sector has been underwhelming throughout the most recent bull market, further highlighting the difficulties in generating a strong return on capital for the most widely used commodity. Although Exxon exhibits strong economic moats within the industry primarily through its costs advantages, the move away from reliance of oil by governments, consumers, and corporations alike continues to pressure the value of XOM’s energy assets.

Recently, Exxon also tapped the bond market to raise cash for its $14bn dividend payout. Although positive for Exxon in its ability to raise the necessary cash for its dividend, we view the act of borrowing to pay for dividends questions the sustainability and safety of the dividend, further altering our investment thesis in the company.

In our view, NextEra Energy is a strong replacement for Exxon Mobil. Being the largest utility provider in Florida and owning some of the most desirable wind and solar energy assets in the United States, NEE is well positioned to capture future growth in its fast-growing renewable energy business while collecting steady revenue streams from a friendly regulatory environment in Florida. Florida is also seeing strong population growth which is expected to continue as residents and corporations are leaving higher tax states due to capped SALT deductions among many other reasons. This could potentially lead to higher energy consumption in the state which further benefits NextEra Energy.

Preferred Apartment Communities (APTS) owns and operate a diversified portfolio of multi-family, student housing, and office real estate properties mainly in the Southeast region. Despite favorable demographic tailwinds and high-quality assets that APTS owns, their sub-optimal capital structure contains significant leverage for common stock equity holders induced by the preference for preferred stock financing over debt despite market low interest rates. Additionally, the REIT company recently announced plans to internalize management for f their properties (insourcing instead of outsourcing property management) which will likely drag funds from operations due to higher overhead costs. This will add additional strains to its already stressed common stock dividend payout ratio. Investments in the other parts of APTS’ capital structure may be more attractive than its common stock.

Americold Realty (COLD) holds leadership in a niche market- refrigerated warehouse segment and has shown strong growth and robust operational performance over the last few years. COLD’s facilities are an integral component of the supply chain connecting food producers, processors, distributors, and retailers to consumers. Operating in the refrigerated and food market, the industry is anticipated to reach $320 billion by 2026, driven in large part by increasing global population, scarcity of food in some regions, strong demand from emerging economies, and specific demographic changes in the modern world. COLD continues to build and acquire strategic locations domestically and internationally to drive long-term cash flow growth and shareholder value. The company’s capital structure is also more desirable than APTS with most of the financing driven through debt and common equity. 86% of its total outstanding debt is at a fixed rate with a weighted average interest rate of 3.89% for a remaining weighted average term of 6.5 years.