Exxon Mobil Doubles Down On The Dividend – Seeking Alpha
Exxon Mobil (NYSE:XOM) has recently announced a review of its assets where the company announced both an operating expenditure (read: workforce) and capital expenditure reduction while bearing down on its dividends. As we’ll see throughout this article, the company has remained committed to its dividend, indicating the chance of continued long-term rewards.
Exxon Mobil – Exxon Mobil Corporate
Exxon Mobil Review Completed
Exxon Mobil’s strategic review of its business has presented some interesting results. Specifically, the company gave the following overview of its business.
Exxon Mobil Business – Exxon Mobil Investor Presentation
Exxon Mobil is guiding for capital expenditures of $16-19 billion in 2021 and $20-25 billion annually to 2025. The key takeaway here is that, while Exxon Mobil is cutting its capital expenditures significantly, it’s still guiding for heavy capital expenditures. The company has a number of exciting growth plays in Guyana, the Permian, and Brazil, and it remains committed to them.
The company, however, partially due to continuing pain from its massive XTO Energy acquisition of roughly $40 billion, expects an after-tax impairment of $17 to $20 billion. The company, which made massive acquisitions in the late 1990s and the 2008 acquisition, has mostly refrained from making such acquisitions at this time. That’s despite the wealth of opportunity.
Exxon Mobil Plan – Exxon Mobil Investor Presentation
At the same time, there are other key points worth paying close attention to. Specifically, the company is continuing to see massive operating expenditure savings, and it’s on its path to cutting capital expenditures. The company expects that, based on its 2020 assumptions, it’ll double its earnings by 2027, which is several years behind schedule but still respectable.
The after-tax charge here is significant, but it’s also worth noting that the company is adjusting for the oil price collapse. This, in fact, doesn’t mean that when oil prices recover, the company won’t also have the potential for a massive recovery in kind.
Overall Oil Market Overview
The fundamental of Exxon Mobil’s overall performance is what oil markets have done.
Oil Market Supply and Demand – Exxon Mobil Investor Presentation
The reason for the devastating effects on Exxon Mobil is the massive collapse in oil demand that’s clearly visible at the start of 2020. Specifically, unprecedented industry demand meant that OPEC+ agreed to an unprecedented supply cut on the order of roughly 11 million barrels/day. The group has committed to steadily alleviating that while looking at markets.
That, combined with North American production shut-ins, has caused supply to drop dramatically. It has since recovered some, but not nearly as much as demand is expected to. Going into 2021, we’re expecting a much stronger demand recovery, as the vaccine rolls out, with a much smaller recovery in supply.
The key takeaway here, so far, is that OPEC+ has a range of prices that they’re comfortable with that they haven’t revealed. With Brent at almost $50/barrel, the arguments in the OPEC+ meeting this past week indicate that some members (likely Russia) are already happy with current prices. That does indicate a partial upper ceiling on prices of ~$60-70 that OPEC+ will maximize production before.
Exxon Mobil Growth and Capital Spending
Exxon Mobil has significant growth and capital spending opportunities. The company is clearly assuming this based on its investments. It has a $175 billion market capitalization currently, and it’s planning on spending roughly 10% of that in 2021 on growth in a massive down year. Going into 2020-2025, it expects to keep that much closer to 15% of its current market cap.
That continued spending highlights the company’s overall commitment to growth and its faith in its opportunities. Since Exxon Mobil is a massive company, we don’t have time to discuss all of its assets in details. So, we’ll focus on what we view as two of its highest potential that it remains committed to, Guyana and Exxon Mobil.
Exxon Mobil Permian Basin – Exxon Mobil Investor Presentation
Exxon Mobil has a massive resource of ~10 billion resources in the Permian Basin. In the Midland development basin, the company has ~20% of its resources developed out of ~2.5 billion barrels. In the Midland, where the company has roughly 7.5 billion barrels, it only has ~3% of resources developed.
The company is currently producing ~300 thousand barrels/day from the Permian Basin. However, it foresaw eventual production hitting nearly 1 million barrels/day. With the company having more than 9 billion barrels in resources, this implies the ability to hit its production targets for decades to come.
It’s also worth noting as the company develops infrastructure and its massive asset base, it’s aiming for a $15/barrel breakeven. That means, with current WTI prices >$45/barrel, it can get an extra $10 billion in annual profit from this operation alone.
Exxon Mobil Guyana – Exxon Mobil Investor Presentation
The company’s other massive potential asset base is in Guyana, where the company has breakeven of $25-30 Brent across this massive asset base (at a 45% breakeven). The company had 5 discoveries in 2019, with 16 discoveries out of 18 wells drilled in Stabroek block. The company expects production to hit 1 million barrels/day in 2026, with 8 billion barrels of resources.
There are several things worth paying close attention to with the Stabroek block. The first is that the company has had massive discoveries with its nearly 20 wells drilled so far, but it still has more than 50 leads. Given the amount of oil under the block and the significant under drilled assets, it’s plausible the company’s assets here will expand to ~25 billion barrels.
The second important point here is that, while the company has a 45% stake of the assets, production can expand significantly from these new assets. Specifically, production could hit, assuming proportional production, 3 million barrels/day for nearly 25 years from the overall asset portfolio. At $50 Brent, in that scenario, that’s >$12 billion in annual profit.
Exxon Mobil Dividends and Financial Picture
Exxon Mobil’s continued problem remains its massive dividends of nearly $15 billion annualized. These are dragging back the company’s financial picture as it utilizes the downturn to issue significant debt.
Exxon Mobil Liquidity Availability – Exxon Mobil Investor Presentation
Exxon Mobil’s biggest strength is its massive amount of excess liquidity. The company issued $15 billion of term debt in 2Q, and its peer range are manageable. The company has more than $10 billion in cash and $15 billion in revolving credit facilities. The company has the financial leeway to pay the dividend for at least another 2-3 years.
Given that prices have already recovered to $50 Brent, that strong recovery means that the company likely won’t need to handle another 2-3 years of low prices where it can’t cover its dividend. The company, in its recent review, clearly doubled down on its dividends. We expect the company to do whatever it has to protect its dividends, and with the recovery in oil prices, it can.
However, it’s clear that Exxon Mobil is at a turning point. The company, whether it’s willing to admit it or not, needs a recovery in oil prices, or at least prices to continue at their current levels, for the next several years. However, it’s worth also paying close attention to the fact that, from now until 2025, the company will be spending 50% of its market capitalization on growth.
Going into the late 2020s, this will start to pay off. Specifically, we’re expecting that from now until the end of the decade, Exxon Mobil will generate incredibly strong shareholder returns.
Exxon Mobil Risk
Exxon Mobil’s risk is quite obvious at this point; the company is susceptible to oil prices. WTI prices are currently more than $46/barrel, and Brent crude prices are now nearly $50 per barrel. We don’t see the oil markets as giving Exxon Mobil proper credit for current oil prices, and the OPEC+ deal seems optimistic, but if prices fall further, the company is at significant risk.
These risks are worth paying close attention to. Exxon Mobil, as undervalued as we feel it is currently, is fundamentally a play on a recovery in oil prices.
Conclusion
Exxon Mobil has an impressive portfolio of assets, which is something worth paying close attention to. Not only is the company continuing to generate strong cash flow from its current asset portfolio, but it also has strong room to grow. It clearly sees the potential for profits with Brent near $50/barrel, and it’s investing massively.
Over the next 5 years, the company is investing half its market capitalization in growth. It remains committed to its dividends. However, whether it’ll truly be able to pay those dividends remains to be seen. That requires oil prices to remain strong. We foresee it happening, but investors should always pay attention to the risks.
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Disclosure: I am/we are long XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
