Introduction
The recent years have seen the management of Exxon Mobil (NYSE:XOM) receiving criticism that their actions are unfriendly to their shareholders, such as those recently expressed by one of my fellow Seeking Alpha contributors. Whilst I certainly respect their perspective and the points made, I nonetheless still believe that this largely stems from differing subjective perspectives coupled with a desire for them to be someone they are not. Instead of simply just arguing that their efforts to preserve their cherished dividend is adequate evidence of them being shareholder-friendly, I will instead share my perspective on two other important areas of the current discussion.
Environmental Sustainability and Renewable Energy
The first area where they seem to be receiving ever-increasing criticism is their continued focus on their fossil fuel investments whilst the world is transitioning to renewable energy. Although I believe that this transition is certainly underway, it nonetheless still seems reasonable to expect that demand for their fossil fuels will remain at a material extent for several more decades, as the two graphs included below display.
Image Source: BP Energy Outlook 2019.
The main point that I wish to make is not that I know exactly what the future holds for fossil fuels, but rather that their current decision should not be considered unfriendly to their shareholders. No one knows for certain whether by transitioning quickly in the short term or waiting until further down the road is of a higher intrinsic value to their shareholders and thus each investor is entitled to their own respective opinions.
Ultimately, only time will prove whether their current strategy is optimal. However, it should be remembered that at least they are still providing the market with a clear investment case. Just because an investor may disagree with their strategy does not mean that these actions are inherently unfriendly to shareholders. If an investor disagrees with this strategy as it does not align with their views for the future, then they can easily select a different investment.
One of the primary benefits, if not the single most important benefit of holding highly liquid investments such as shares, is that investors can easily adjust their investment exposure without incurring a significant expense. Presently, I view them as a desirable contrarian investment opportunity to capitalize on a likely further recovery in oil prices, which I plan to subsequently reassess as a potential long-term dividend investment once operating conditions recover.
Capital Expenditure and Future Oil Prices
The second area that often receives significant criticism is their relatively high capital expenditure that aims to reignite their growth after years of rather underwhelming performance. Whilst they have recently reduced their 2020 forecast capital expenditure by 30%, even at $23b it still remains higher than most of their recent history, as the graph included below displays. During the worst year of the previous oil price crash, 2016, their capital expenditure was significantly lower at only $16.678b.
Image Source: Author.
Even though they have reduced their forecast capital expenditure for 2020, when looking further into the future they are still maintaining their guidance for between $30b and $35b, as the graph included below displays.
Image Source: Exxon Mobil 2020 Investor Information Presentation.
Generally speaking, I believe that high capital expenditure is neither inherently shareholder-friendly nor unfriendly, especially in the medium to long term for an oil and gas company. Due to the very high capital intensity of their industry and the self-depleting nature of their projects, continued capital expenditure is unavoidable in order for them to remain a going concern. High capital expenditure is required to produce material growth and thus ultimately grow their shareholder returns.
They have even been compared to the now notorious Occidental Petroleum (OXY) at times; however, there is one important difference. The latter undertook their massive investments through acquiring Anadarko Petroleum, to keep their current management in power and fend off any possible takeover bids. Growing larger for the sake of being larger is unfriendly to shareholders, whereas growing larger to increase future returns to shareholders is not unfriendly.
Regardless of the short-term future for oil and gas prices, their strategy should prove fine provided their projects offer compelling value since they should effectively win regardless of the direction commodity prices take in the short term. I see that there are three primary scenarios that future oil and gas prices will take with the first being the simplest, which sees them surging higher in the short term before moderating to a more reasonable middle of the road level in the medium to long term. If this eventuated it would be a rather open and shut situation, as they could easily afford to fund their high capital expenditure and since there would be a supply deficit, hence the high prices, there would also be adequate demand for their new supply.
The second scenario would see oil prices taking a further plunge lower again in the short term, possibly due to subsequent waves of coronavirus infections causing further lockdowns and thus economic damage. Whilst this would be very painful in the short term, they should still be fine in the medium to long term because they can outlast virtually all of their peers. If this eventuated it would cause vast waves of their smaller peers to file for bankruptcy in the short term and thus ultimately cause material quantities of future competing oil and gas production to be removed from the market. Once operating conditions eventually recover in the following years, their new oil and gas production will be required to fill the supply deficit left from their now bankrupt peers.
Since the industry is currently fragmented and filled with near-countless small, financially weak companies, I believe that the only way oil prices could stay depressed into the long-term would be from a complete global economic collapse. If this highly undesirable outcome eventuates, I strongly suspect that no investors are going to be sitting around wishing that any particular oil and gas company had a different level of capital expenditure in 2020 and 2021.
Meanwhile, the third scenario would see an in-between situation going forward that is overall similar to that of 2017-2019 when oil prices were neither high nor low on average. If this eventuated it would indicate that the market is neither materially oversupplied nor undersupplied, which means that their additional oil and gas production can still be absorbed. This would relive the majority of the pressure that their high capital expenditure creates on their financial position, whilst also ensuring that their projects produce adequate returns.
Image Source: Daily FX & Author.
Conclusion
Their strategy means that shares are not suitable for every investor. However, this could be said for essentially all companies and thus it does not automatically mean that they are being unfriendly to their shareholders. At the end of the day I believe that when selecting investments, investors need to be realistic about what investment case a company is offering their shareholders and not expecting them to suit every agenda.
If an investor is seeking a large oil and gas company with a strong financial position that is making counter-cyclical investments in fossil fuels, then their actions will seem shareholder-friendly. If an investor is seeking a company investing aggressively in renewable energy, then clearly they are not shareholder-friendly in their eyes. Whilst I believe that maintaining my bullish rating is appropriate, if their share price continues rallying strongly in the coming months this may be downgraded to a neutral rating.
Notes: Unless specified otherwise, all figures in this article were taken from Exxon Mobil’s 2019 10-K and 2017 10-K SEC filings, all calculated figures were performed by the author.
