To The Moon

$Exxon Mobil(XOM)$ 

Exxon Mobil Corporation (XOM) is one of the world’s largest oil & gas companies and operates in the United States as well as most other countries of the world. Worldwide, ExxonMobil markets fuels, lubricants and chemicals under four brands: Esso, Exxon, Mobil and ExxonMobil. Its principal business involves exploration and production of crude oil and natural gas, trading, manufacture and marketing of refined petroleum products and petrochemicals. In 2021, total oil and natural gas liquids production amounted to around 1.6mmbpd, one of the largest private producers. Including gas and other liquids, total production was around 3.7mmboepd.

Investment Overview

Strong earnings potential and emission-reduction goals in place. Robust projected EBITDA and EPS growth rates in the near term, combined with focus on low carbon emissions places XOM in a competitive position in the energy industry. We expect growth in multiple segments such as upstream, downstream and low carbon solutions, as customer needs are satisfied with a variety of energy transition scenarios. The company achieved its emission reduction goals of 2025 ahead of schedule in 2021 and further plans were set to be achieved by 2030 to reduce absolute emissions by 20%. XOM is also investing c. US$15 bn over next years focusing on carbon capture and storage (CCS) and development of other cleaner energy alternatives such as hydrogen and biofuels.

Low-cost strategy a key competitive edge. XOM's low-cost organizational structure reduced costs by c. US$2bn in 2021, with total savings of c. US$5bn over the last two years. We expect this effect to spill over the next few years, bringing more savings to the company, contributing to increased earnings. The company also invested in the expansion of its recoverable resource in Guyana, increased Permian production and divested c. US$3bn of non-core assets to improve efficiency. Further, XOM reduced its net debt to pre-pandemic levels, showcasing more room to fund future investments.

Stable growth and high shareholder returns are XOM's key strengths. The company has a robust historical free cash flow growth and high forecast earnings growth compared to its industry peers. A high modified payout ratio and high return on equity provide stability in shareholder wealth. Further, XOM's debt position as mentioned before is healthy with a low gearing and a high interest coverage, which is a big positive amid rising interest rate environment. ESG metrics are possibly the one area where XOM management may need to focus more to deliver further re-rating.

Global presence brings some risks. XOM is exposed to significant macroeconomic risks as earnings depend on the price volatility of crude oil, natural gas and other refinery products. Further, the company is impacted by changes in economic conditions of various regions given its global presence as, recessionary environment could reduce demand for its products. Also, XOM is exposed to significant legal and regulatory risk as energy industry is highly regulated in different jurisdictions across the world. Post the Ukraine conflict, Exxon had to exit its Russian project Sakhalin-1, worth more than US$4bn, without any compensation, leading to write-downs.

Share price is supported by high modified pay-out ratio compared and steady dividend yield of ~4%. Oil prices are expected to stay resilient at elevated levels in 2023 despite recession fears, continuing to support share prices for upstream players. Potential share buybacks could be additional catalyst in near term.

At current levels, I am still cautious about entering the stock as it is rather elevated for an impending recession. China's reopening is unlikely to provide a big boost to consumption and the global slowdown will likely dampen demand for oil. There are a few downside risks at the moment. 

@TigerStars 

DYODD