The Value Portfolio profile picture

ExxonMobil Building

simonkr/E+ via Getty Images

Exxon Mobil (NYSE:XOM) announced a blowback quarter, with some of the highest earnings in its history, and a low double-digit P/E ratio. The company announced a massive expansion of its share buyback program to $30 billion. As we’ll see throughout this article, the company’s physical assets, low breakeven costs, increased relevance, making it an incredible stock for a high inflation environment.

Asset Portfolio

Exxon Mobil has one of the most unique and large scale global asset portfolios.

ExxonMobil

Exxon Mobil Investor Presentation

Exxon Mobil strong asset portfolio is evidenced by the company’s recent addition of more than 1 billion barrels of reserves to its Guyana assets, through 3 new discoveries. In the Permian Basin the company has the largest contiguous development and it’s built up a unique asset portfolio with massive owned acreage.

The company’s efficient scale and assets here mean it can generate double-digit returns at <$35 / barrel, significantly below current prices. We expect the company to ramp up production and continue to focus on asset development here. By 2027, production is expected to almost double from current levels towards 1 million barrels / day.

In Guyana, the story is similar. The company’s sanctioned Guyana projects which will bring production towards 800 thousand barrels / day use only 40% of the company’s reserves. The company is continuing to make new discoveries and ramp up production, while maintaining its incredibly low breakevens of roughly $30 / barrel.

Across the board the company has a unique and low cost basis of assets.

1Q 2022 Earnings

Exxon Mobil achieved impressive 1Q 2022 earnings, despite an almost $4 billion write-down as the company exited Russia.

ExxonMobil

Earnings – Investor Presentation

Exxon Mobil had strong earnings and a P/E of <11 not counting one-time items such as the multi-billion impact of the company’s Russia exit. The company has continued to invest heavily in its business with a full-year target of $21-24 billion in capital spending and continued structural savings. Both of these things have the ability to opportunistically expand.

As a sign of the company’s financial strength, the company earned $9.9 billion in FCF with $4.3 billion in cash after both shareholder distributions and some debt reduction. The company spent $5.8 billion on shareholder distributions including roughly $1.9 billion in share repurchases or >0.5% of the company’s outstanding shares.

The company’s double-digit FCF yield with significant shareholder returns shows its financial strength.

Exxon Mobil Continued Evolution

Exxon Mobil is continuing to evolve.

ExxonMobil

Continued Evolution – Investor Presentation

The company is now treating low carbon solutions as a major aspect of its portfolio. Exxon Mobil now admits that shifting to lower emissions is essential and the company has the unique ability to be a part of that process. Specifically, the company can benefit both from the move away from coal to natural gas and carbon capture.

Coal is no longer the cheapest form of electricity. Natural gas is cheaper and in the right environment plenty of renewables are cheaper as well. While renewables plus storage can help support variable demand the core demand for energy still needs to come from somewhere. With coal more polluting, and nuclear not in favor, natural gas represents a strong option.

For carbon capture, Exxon Mobil is the world leader in captured carbon. Capturing carbon and storing it for thousands of years or longer enables humanity to acknowledge that some activities essential to our lifestyle are polluting. We expect that large scale carbon capture will be part of the solution, and Exxon Mobil is well positioned for that.

Exxon Mobil’s Contribution To Our Lifestyle

Among the important factors for Exxon Mobil’s longevity is the company’s important contribution to our lifestyle. While debates about oil, climate change, the consumption and format of fuel can continue to rage on, one thing is clear. Energy, in a variety of forms, is essential to our modern standard of living.

Natural gas is a lower emission fuel (versus coal) and incredibly energy dense. With LNG it’s increasingly portable. Exxon Mobil is expanding in renewables as discussed above, and the company has the project expertise, know-how, and capital resources to continue growing in renewable energy. That contribution to our lifestyle means that Exxon Mobil will be around for a while.

Cheap Oil Stocks

In a high inflation environment, traditionally the market moves towards real assets. Real estate and crude oil are two examples of that.

So the question becomes, why invest in oil stocks? The reason is valuation. Crude oil is recovering from a multi-year recession, with prices crossing $100 / barrel for the first time since mid-2014. That’s despite cumulative inflation from the start of 2014 totaling roughly 23%, driving down the value of the dollar significantly.

That slow recovery, as well as investor concerns about the industry, means that many crude oil stocks are still trading at incredibly low valuations. Exxon Mobil is targeting $30 billion in annual share buybacks over 2 years and is barely at a double-digit P/E. That means not only do these companies have the ability to handle inflation, but they’re also still trading at an incredibly low value.

Thesis Risk

The largest risk to our thesis is crude oil prices. Prices have been incredibly volatile before, even when the macroeconomic environment favors increases, and there’s a chance that in the current high price environment, production could increase significantly. That could drive down prices and hurt continued returns.

Conclusion

Exxon Mobil has seen its share price recover significantly over the past year as crude oil prices have recovered. However, as the company’s recent earnings show, that strength is justified. The company trades at a low double-digit P/E with a manageable debt load. It comfortably shrugged off needing to exit the Russian markets.

The company is focused on continued shareholder returns and it’s significantly expanded its buyback program to $30 billion. The company’s assets have a unique ability to outperform in the current high inflationary environment, and with the company’s valuation, that helps reinforce the company as a long-term investment.

Leave a Reply

Your email address will not be published.