Exxon Mobil: Double-Digit Shareholder Rewards With A Single-Digit 2025 P/E Ratio
- Exxon Mobil has an impressive portfolio of assets. The company has significant upstream assets, with major deepwater drilling, Permian Basin growth, and LNG.
- XOM is also focused on its downstream and chemical businesses to maximize margins. That will combine well with the company's upstream portfolio growth.
- Earnings should grow significantly, decreasing its P/E ratio towards the single digits and enabling double-digit shareholder rewards.
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Exxon Mobil (NYSE:XOM) is the largest publicly traded oil company in the world (outside of Saudi Aramco). This is despite COVID-19 fears pushing the company's market capitalization towards $200 billion and dividend yields towards 7%. The company recently had its 2020 investor day, highlighting its potential to generate shareholder value, something that makes it a strong, long-term investment.
Exxon Mobil is primarily focused on the upstream sector of its portfolio, something that's easily the most exciting aspect of its portfolio. The company is planning on spending billions annually on this part of the portfolio, something that could accommodate numerous acquisitions.
The upstream portfolio is centered on three major segments - the company's unconventional Permian Basin assets, Guyana and Brazil deepwater assets, and PNG and Mozambique LNG assets. These three major segments of the company's portfolio will result in more than half of its production by late 2020s and generate double-digit returns at low prices.
However, it's worth noting that LNG prices have dropped well below $5/mbtu across a number of markets recently.
Permian Assets - Investor Presentation
In the Permian Basin, Exxon Mobil built up a massive portfolio with a resource base of ~10 billion barrels. The company is focused on building a portfolio of mature infrastructure, capturing land synergies where available. It has developed a mere 20% of its resources in the developed Midland basin and believes it can sustain the current development pace past 2025.
Given that the Permian Basin is seeking to increase daily production past 1 million barrels/day, the company would have a multi-decade resource runway. That's enough to sustain long-term production. Exxon Mobil's Permian Basin production has grown significantly from 50 thousand barrels/day in 2015 to 250 thousand barrels/day in 2019.
By 2020, the company anticipates reaching almost 400 thousand barrels/day, increasing to more than 600 thousand barrels/day by 2021. The company still anticipates reaching more than 1 million barrels/day by 2024 and expects that it will earn >10% returns at $35/barrel. That means that at current oil prices, it can earn significant profits.
Permian Central Assets - Investor Presentation
Exxon Mobil is working on lowering potential development costs to achieve those margins. The company beat its goals for returns recently, and this strategy could allow it to increase returns further. This is a strategy that only the company can take advantage of, with its massive asset portfolio and acreage. Having a lower break-even than other Permian producers means it has a lower break-even.
The above image shows the development portfolio that the company is working on. It's working on multi-pad well corridors, something that allows it to barely move rigs and handle the transfer of infrastructure. That focus and the processing of oil and liquids at a central processing point where they can be exported from there highlight Exxon Mobil's unique advantage.
Guyana - Investor Presentation
Another major upstream opportunity for Exxon Mobil is the Guyana basin. This is a project for the company that I've discussed several times before, and it's one of rapid growth. As can be seen from the company's discoveries above, it's really only explored a small portion of the acreage across the massive 6.6 million acre block. The company had five discoveries in 2019 averaging 600 million barrels each and one to date in 2020.
More importantly, out of the company's 18 drilled wells here, it has had 16 discoveries. The company has an undrilled portfolio of more than 50 wells and plans for 5 exploration wells in 2020, something that'll add potential billions to resources. Simultaneously, the company is working on a regulatory approval for a much larger 31-well campaign (something that could more than double present resources).
XOM expects the Liza Phase 2 startup in 2022. Liza Phase 2 is expected to have a mere $25/barrel Brent break-even. Payara, with Phase 3, should start in 2023, with expected resources of 220 thousand barrels/day. That means that Guyana's production in 2023 should be more than 500 thousand barrels/day. The company plans on FPSOs 4 and 5 to push production past 750 thousand barrels/day in 2025.
It's worth noting that assuming FPSOs 4 and 5, which are still being on, have the same production as earlier FPSOs, 2025 production will be at more than 900 thousand barrels/day. Exxon Mobil's 45% share here will be ~400 thousand barrels/day.
Brazil - Investor Presentation
Brazil is another area where Exxon Mobil is expanding, although for now, the specifics of the production are less defined. However, a late-2020 FID is a major catalyst worth paying attention to, especially with the first oil targeted in 2023/2024. Exxon's 2.5 million acre position here is in line with other majors, like BP (BP) and Royal Dutch Shell (RDS.A) (RDS.B), but the company hasn't given out the specifics of its growth plans.
It's also worth noting here that the company has the unique ability of the relatively close and massive Guyana deepwater project. It can apply what it's learned there to Brazil.
Mozambique - Investor Presentation
The last major potential growth opportunity for Exxon Mobil is LNG. It's worth noting that Exxon doesn't have a great history when it comes to making natural gas investments, having made what most view as a "$40 billion mistake" in its acquisition of XTO Energy. This acquisition, Exxon Mobil's largest since the actual merger of Exxon with Mobil, came at a peak for North American natural gas prices.
Similarly, as we discussed above, the company anticipates strong returns at $5/mmbtu LNG prices; however, recent pricing trends have been significantly worse than this. However, the benefit of LNG is that as a clean energy, demand is growing rapidly. Exxon Mobil's Mozambique projects have the potential for >40 Mta in LNG projects. The company has a 25% interest in this.
Additionally, in PNG, Exxon is looking to develop more than 16 Mta of resources from a ~10 Tcf net resource. Overall, that means that the resources attributable to the company are more than 25 Mta. That's a significant natural gas resource that can help better position the company for the future. Based on current prices, that's close to $10 billion/year in LNG revenues.
The net result of Exxon Mobil's work here is production growing from ~3.9 million barrels/day to 5 million barrels/day in 2025. This is in addition to massive improvements in margins that will help the company's earnings.
The downstream business is another integral part of the company's production. The business is incredibly important not just for its profits but also because it enables the company to maximize profits for every barrel produced. It's one of the reasons why the company has been working so hard on its Permian Basin downstream business.
However, the downside here is that downstream prices have been impacted along with upstream prices recently.
Downstream Modification - Investor Presentation
Exxon has been focused on making its portfolio increasing high grade for millions of barrels. The higher conversion is bringing the portfolio significant income per barrel, and the company has earned almost $7/barrel in recent years additionally. XOM is focused on numerous projects across a substantial number of refineries to increase margins.
That's especially good given the current difficult downstream environment. It's also worth noting that a significant part of the company's improvements here and across the board are from small capital projects to improve margins. These many small capital projects can help to support profits, and smaller capital projects tend to have much stronger returns than other projects.
The last major segment of Exxon Mobil's business is the chemical business. This is arguably one of the most resilient aspects of its portfolio. Just because oil and natural gas use declines due to climate change, it doesn't mean that people will no longer need motor oil.
Chemical Business - Investor Presentation
As the world's middle class increases, with the middle class expected to nearly double by 2023, demand for oil-based packaging, vehicles, and clothing are all expected to increase significantly. Tens of millions of vehicles, along with millions of tonnes per annum of fibers for clothing and flexible packaging, all mean significant demand for oil based products.
That demand will continue to support Exxon Mobil's chemical business. More importantly that demand is independent of oil and natural gas demand for energy.
Putting all of this together, we can see how Exxon Mobil, as a company with a $210 billion market capitalization, has significant potential.
Earnings - Investor Presentation
Exxon is planning to spend a significant amount of capital on growth. From 2020 to 2025, the company is planning to spend $180-210 billion on growth. That's nearly equivalent to its entire market capitalization being spent on growth over a six-year period. The estimated returns on this spending is expected to be ~20%, something that'll highlight shareholder returns.
The above image highlights the earnings potential from a variety of its businesses. At $60 Brent and assuming Downstream and Chemical prices are at a five-year average, the company should have 2025 earnings of ~$35 billion. Assuming prices are at their five-year low, with $50 Brent, the company should have 2025 earnings of ~$20 billion.
Exxon Mobil has a market capitalization of $210 billion and annual dividends of ~$15 billion (at ~7%). That means, assuming an average price scenario in 2025, the company will have a P/E ratio of <7. Assuming prices near a five-year low, the company will have a P/E ratio of ~10. These two things highlight its significant earnings potential and shareholder rewards.
From 2020 to 2025, Exxon Mobil is expecting near $150 billion in FCF. For those six years, the dividends are expected to be ~$105 billion. That leaves the company with the remaining FCF to repurchase nearly 25% of its shares at current prices. Effectively, not only will the company be rapidly improving its portfolio and cash flow, but it'll also be generating double-digit shareholder returns in the meantime.
These things together, in a market with its P/E ratio approaching 30, make the company an exciting investment.
Despite this potential, Exxon Mobil has two major risks worth paying attention to. The first is the risk of climate change and the second is the risk of project execution.
The climate change risk is significant. Exxon Mobil's European competitors have pledged to eliminate their emissions as an increasing number of people clamor that we move away from fossil fuels altogether. Exxon has disagreed with this stance continuing on its portfolio and its execution. The company risks being left out, and as coal has shown, even a slight drop in demand can harm prices and bankrupt companies. Climate change and the increasing regulations around it are a risk shareholders should pay attention to.
The company's second risk is project execution. The company is spending close to its entire market capitalization on new projects from now until YE 2025. That's a significant amount. Traditionally the company has done well with its project execution, such as Guyana. However, it's worth noting that there is a risk it doesn't execute upcoming projects, especially for example lower LNG prices in a difficult market. This is also a risk investors should look at.
Exxon Mobil's investor day position on March 5th highlights its potential for long-term growth. The company is executing across its businesses and has significant potential here. More significantly, it has a number of major upstream, downstream, and chemical projects that should help to grow production and maximize margins.
Earnings should grow significantly. The company at a five-year average earnings ratio should see its P/E ratio increase to a mere 7 as it continues double-digit shareholder returns off of its FCF. Even at five-year lows, it should see a P/E ratio of ~10. That's a low P/E ratio that combined with double-digit returns should lead to strong shareholder rewards.
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