Exxon Mobil: Future FCFs Justify The Bullish Case

Summary

• Exxon Mobil Corporation, which was incorporated in 1882, is one of the largest oil and gas conglomerates in the United States and the entire world.
• According to Barclays, global energy demand will rise by 20% by 2040, and gas and oil will continue to be some of the largest sources of energy.
• The company expects to maintain a stable debt/capital ratio until 2025. Exxon Mobil expects to have the capacity to make acquisitions, make accretive investments, and borrow at good rates.
• With XOM’s analysts’ estimates and a WACC of 8.5%, I obtained an implied share price of $37-$71, which mostly depends on the company’s long-term growth.
• Under my optimistic case scenario, if the company’s FCF reaches $10-$21 billion from 2021 to 2025, the stock price will most likely touch $85.

Douglas Rissing/iStock via Getty Images

Exxon Mobil Corporation (NYSE:XOM) is under the radar of many investors because of the popularity of alternative energy sources. In my opinion, the global oil demand will continue to grow in the future. Under my optimistic case scenario, which includes FCF of $10-$21 billion, the company’s stock price will reach a share price of $85. If the regulatory framework does not change much and taxes don’t destroy returns, Exxon Mobil remains a good idea.

Oil Demand And Exxon’s Financial Stability

With the overwhelming amount of information in the media about the new electric vehicles, most investors may think that the demand for oil is going to disappear. I invite investors to do their own research and consult different sources:

Liquid fuels provide the largest share of global energy supplies today reflecting broad-based availability, affordability, ease of transportation, and fitness as a practical solution to meet a wide variety of needs. By 2040, global demand for liquid fuels is projected to grow to approximately 110 million barrels of oil equivalent per day, an increase of about 9 percent from 2018. The non-OECD share of global liquid fuels demand is expected to increase to about 65 percent by 2040, as liquid fuels demand in the OECD is likely to decline by close to 15 percent. Source: 10-K

You will most likely discover that oil demand will continue at least until 2040. According to the following presentation given at the Barclays Energy Conference, the global energy demand will rise by 20% by 2040, and gas and oil will continue to be some of the largest sources of energy:

Source: Barclays Energy Conference

Source: Barclays Energy Conference

Exxon Mobil Corporation, which was incorporated in 1882, is one of the largest oil and gas conglomerates in the United States and the entire world. The company has gone through two global wars and oil and gas crises in the 1970s and 1980s. I don’t expect the future to be exactly like the past. With that being said, I don’t expect Exxon to disappear any time soon. The company explains its business model with the following words:

Their principal business involves exploration for, and production of, crude oil and natural gas and manufacture, trade, transport and sale of crude oil, natural gas, petroleum products, petrochemicals and a wide variety of specialty products. Affiliates of ExxonMobil conduct extensive research programs in support of these businesses. Source: 10-K

Exxon Mobil expected a significant cash flow potential from operations from now onwards till 2025. I will show later that most analysts are expecting an increase in FCF. The company also noted that it could divest a significant amount of assets, which would give the company cash to engage in new opportunities:

Source: Barclays Energy Conference

The company also expects to maintain a stable debt/capital ratio until 2025. Exxon Mobil expects to have the capacity to make acquisitions, make accretive investments, and borrow at good rates:

Source: Barclays Energy Conference

I don’t expect investors to be afraid of the company’s financial obligations. The company reports a net debt/EBITDA of 1.5x-3x, and its notes bear an interest rate of 0.14%-1.4%. In my opinion, the company’s financial situation is very solid:

Source: 10-Q

After more than 100 years of operation, it is quite surprising that the company’s balance sheet appears clean. It appears very clear that the management knows the industry very well. As of March 31, 2021, the company’s asset/liability ratio is 1.9x, and the company reports cash of $3.5 billion:

Source: 10-Q

Source: 10-Q

Analysts Estimates And WACC of 8.5% Imply A Share Price Of $37-$71

The market believes that XOM’s revenue will increase significantly in 2021 and 2022. However, for some reason, market analysts expect sales growth to stop in 2023. I decided to use the same rationale in 2024 and 2025. I assumed sales growth of only 3%. I also maintained capital expenditures a bit low as I believe that XOM may gradually decrease its investments. Take into account that most investors these days seem to be preferring clean energies. Finally, the FCF from 2022 to 2025 is $10-$11.5 billion, which is approximately the FCF obtained in 2013. I believe that my assumptions are very conservative:

Source: My Figures

Most investors will be using a WACC of 7.2%-8.5%. As I said, I am trying to be conservative. Now, with a WACC of 8.5%, the sum of the free cash flows of first five years is $43 billion:

Source: My Figures

I assumed a long-term growth rate of 4%, a terminal FCF of $12 billion, and net debt of $61 billion. With a share count of 4.2 billion, the implied share price is equal to $37:

Source: My Figures

I also did some sensitivity analysis with the long-term growth rate. Notice that many institutions are now forecasting significant growth rates in the coming years. If we use a growth rate of 6%, the implied share price is equal to $71. The current share price of XOM is equal to $50-$60, so under this case scenario, the company would be a buy.

Source: My Figures

My Estimates And WACC of 8.5% Imply A Share Price Of $85

The terminal FCF assumed in the previous case scenario is close to the free cash flow obtained when the oil price was at its highest point in the last decade. In my opinion, if the oil price stands at $75-$110, XOM will be trading between $37-$71.

Now, let’s assume for a moment that the oil price reaches $150-$175. I know it sounds a bit excessive. But, taking into account the number of dollars printed in the United States during the pandemic, $150-$175 could make sense. In this case scenario, I would be expecting an FCF of $10-$21 billion from 2021 to 2025:

Source: My Figures

With a long-term growth rate of 4.5%, a WACC of 8.5%, and a 2026 FCF of $22 billion, I believe that the enterprise value would be close to $426 billion. If we assume a share count of 4.2 billion, the implied share price is equal to $85:

Source: My Figures

Regulatory Risks In Certain Jurisdictions, Climate Change, and Greenhouse Gas Restrictions

XOM does business in certain countries, where governments don’t maintain clear regulatory frameworks. Lack of certainty may be a disaster for the company’s operations because government officials could take actions that XOM may not expect. As a result, the company’s expected revenue may never be reached.

In other countries with well-developed legal systems, the company may also suffer from increases in taxes and changes in environmental law. With the current level of debt of some governments around the world, the expropriation of assets could also occur.

There is a global concern over the risks arising from climate change. Governments could take action to reduce the production and use of oil and gas to prevent greenhouse gas emissions. Actions that may hurt the company’s business model may include carbon taxes or mandates for renewable energy. That’s not all. Politicians also seem to be undertaking actions to reduce the amount of financing in the oil and gas industry:

Political and other actors and their agents also increasingly seek to advance climate change objectives indirectly, such as by seeking to reduce the availability of or increase the cost for, financing and investment in the oil and gas sector and taking actions intended to promote changes in business strategy for oil and gas companies. Source: 10-K

Conclusion

While most investors are currently looking at other energy players, I believe that XOM could also be a winner. In my opinion, oil demand will continue to grow, which makes XOM an outstanding investment. With XOM’s analysts’ estimates and a WACC of 8.5%, I obtained an implied share price of $37-$71, which mostly depends on the company’s long-term growth. However, under my optimistic case scenario, if the company’s FCF reaches $10-$21 billion from 2021 to 2025, the stock price will most likely touch $85.

Disclosure: I/we have a beneficial long position in the shares of XOM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.