Breaking Down ExxonMobil Stock – A Veteran of Oil & Gas

ExxonMobil has long been a market leader in oil & gas. The direct descendent of Standard Oil Co., Rockefeller’s oil empire, which was the largest refiner in the world at its height, ExxonMobil remains the company with the sixth largest net revenue in the world. However, after several bleak years beginning in 2015, the company’s revenues started succumbing to the strength of the OPEC countries controlling supply and more recently to the COVID-19 pandemic which all but wiped-out demand. Nonetheless, the ExxonMobil share price has made a sharp recovery since the beginning of the pandemic. That said, the company’s market capitalisation remains low, at under 200 billion USD, less than half its all-time peak in 2014. There are several explanations as to why this may be, the most evident being the global recession creating a windfall in commodity demand and subsequently, prices. Furthermore, an important underlying reason is that this year has become a milestone for action against climate change. Governments and special interest groups have been making business increasingly difficult for companies choosing not to reduce their carbon emissions – such as through the Paris climate agreement, green investment quotas for banks and the recently poor performance of portfolios with no ESG considerations. This begs the questions of why Exxon has made the controversial decision to firm oil as its primary asset and how it will now seek to implement green technology in its oil activities.


Exxon has recently announced that they will be spending 3 billion USD on carbon capture technologies at their facilities whilst working on other methods to reduce carbon emissions in their drilling activities. Carbon capture is the process of capturing carbon dioxide that would otherwise be released into the atmosphere from industrial activity and injecting it into deep geologic formations for safe, secure and permanent storage. The United Nations Intergovernmental Panel on Climate Change and the International Energy Agency agree that carbon capture is one of the most important low-carbon technologies required to achieve societal climate goals at the lowest cost. Exxon has over 30 years of experience in employing this technology and was one of the first companies to pioneer its implementation into the oil industry. ExxonMobil’s newly announced Low Carbon Solutions business is also advancing plans for more than 20 new carbon capture and storage opportunities around the world to enable large-scale emission reductions.


A large part of Exxon’s post-pandemic strategy is also to appeal to shareholders that are purely income focused, as Exxon has a history of maintaining an attractive dividend to encourage the buying of its stock. The oil giant has prioritised maintaining a high dividend yield of 7%, a token their shareholders have enjoyed in previous years and certainly a factor to strengthen investor confidence and maintain market capitalisation. However, in order to produce these high yields, the company must review and amend its current cashflow problems. Exxon’s net revenues have stagnated at around 0% over the last 3 years, scaring away long investors searching for stocks with sustained earnings potential. On the 2nd February this year, Exxon reported a 92.7% plunge in their Q4 earnings as revenue dropped 30.7% to 46.5 billion USD – primarily due to the flood of supply in the oil market after the COVID-19 pandemic sent the world into lockdown. Even so, in 2019, Exxon had 31 billion USD in capital expenditures and only generated cash flow from operations of 33 billion USD that year. With oil demand predicted to return to near pre-pandemic levels provided the COVID-19 virus takes a back seat, earlier expenditure should transform into new cash flow later this year.


Alas, to resolve their earnings issues, Exxon has planned to reduce their capital expenditure in 2020 by 30% to around 23 billion USD. The largest share of the capital spending reduction will be in the Permian Basin located in West Texas, an important location for Exxon due to its unique geology allowing a single well to produce both oil and gas from the arrangement of different layers of rock. Here, short-cycle investments can be more readily adjusted to respond to market conditions while preserving value over the long term. Reduced activity will affect the pace of drilling and well completions until market conditions improve. Importantly, however, Exxon believes the reductions will not compromise the scale and functional excellence that is maximizing resource recovery and value in the Permian. However, the firm still managed to disburse almost 15 billion USD in dividend payments to shareholders, suggesting it relied on debt financings to ensure shareholders’ payments were met. It may appear concerning to shareholders that Exxon is decreasing its capital expenditure as it can imply a lack of potential growth, but it might also be a sound decision reflecting plans to increase efficiency and cope with low market prices in the short-term.


In November 2020, CEO Darren Wood told analysts that Exxon could maintain its dividend at 45 USD a barrel. With a West Texas Intermediate (WTI) price of around 55 USD a barrel, John Gerdes  (Managing Director at MKM Partners) calculates the company must grow its cash flow per share by about 2% annually from 2022 to 2025 if it hopes to finance its dividend internally, to reduce debt and return capital to investors. To put things into perspective, crude prices fell from nearly 70 USD a barrel during Q1 in 2020 to a historical low in the negative numbers and then grew to an average of 52 USD now. ExxonMobil has a long history of running conservatively and hedging its bets, currently maintaining a debt-to-equity ratio of 0.35, suggesting it can keep its head above water running on debt until energy demand recovers (as analysts broadly expect). However, if management chooses to avoid accumulating additional debt, then the dividend will likely lose out to capital spending and in turn, the stock may not seem to perform as well for dividend investors. Exxon’s hopes and strategy are underpinned by this year’s vast cuts to global CapEx across the oil sector which should lead to a drop in supply by mid-decade, by which time oil demand will have recovered, allowing Exxon to flourish. Investors are now wondering whether the firm will be able to stay afloat until this resurgence and whether it be able to capitalise on returning demand in a way they can profit from.


By Will Kollard

Sector Head: Edouard Nelson