- From 2020 to now has been a good start towards $80 for XOM.
- Natural gas and LNG demand in Europe and Asia could lend themselves to a higher XOM price.
- Keeping the DUCs in a row should lead to higher oil prices next year.
- Reducing operating costs by $6 billion and buying shares back should increase earnings per share beyond oil price increases.
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Exxon (NYSE:XOM) is a popular and controversial stock. On Seeking Alpha in just the last month, we have seen a variety of ratings including a Bearish, a Neutral, four Bullish, and two Very Bullish.
Personally, I have been Bullish on XOM since last June when I penned this article "Exxon Mobil: I Told You To Sell At $88, Now I'm Telling You To Buy At $48".
Over the subsequent time period, XOM has been volatile but has progressed up the price ladder to its current $60 range mainly, though not exclusively, due to the increase in oil prices over that same time period. But XOM management has made many good decisions and policy changes in the last 12 months that have contributed to XOM's comeback.
Now it is time for me to look at the possibility that XOM can get back to $80 plus within the next year.
Here are four reasons Exxon could get to $80 by the end of 2022.
1. From 2020 to now has been a good start towards $80
If we look at XOM's price action since I published my article on June 16, 2020, we can see it has generally followed oil prices except for the last 6 months where the spread between oil price and XOM price has widened somewhat.
It looks to me if oil prices get to the $80 level (or even higher) and stay there awhile, XOM has a chance to see $80 too even without the additional price drivers outlined below.
Note that the positive changes made by management over the last year were not in place during the summer of 2020 when the prices matched up almost perfectly.
2. Natural gas and LNG demand in Europe and Asia could lend themselves to a higher XOM price
Beyond oil prices, XOM is also one of the world's largest NG (Natural Gas) producers (the largest in the US) and one of the largest LNG exporters worldwide
As Seeking Alpha described it (see here):
- Euro consumers are now paying ~14x the price paid by US consumers, up over 1,000% year over year, and these gas prices feed directly into electricity prices, which are also up ~1,000% YoY across the continent.
The price for LNG is only going to go up as NG starved countries reach for low-emission sources for heating and industrial purposes especially when renewable energy sources are underperforming as they are now.
Here are Exxon's sources and destinations for their LNG production. Looks like a good match for future European and Asian needs.
DUC's (Drilled but Un-Completed) wells are an indication of how much well inventory is available for near-term drilling. In other words, even if you assign capital to drill new wells, they will not be able to actually produce oil for a long time because of the lead times involved. Only wells that have already been drilled but capped while waiting for higher prices can be brought into production short term, i.e., in 2022.
Therefore, increasing production, at least in the US, will be difficult to do in 2022 leading to higher prices assuming increased demand.
And headed down in the recent months heading into 2022.
4. Reducing operating costs by $6 billion and buying shares back should increase earnings per share beyond oil price increases
Exxon has committed to lowering costs by $6 billion by 2023. Assuming that is achieved, earnings per share will improve.
CEO Darren Woods:
We're also ahead of schedule on our work to improve our cost structure, we expect to deliver more than the $6 billion in structural savings by 2023. We continue to find additional synergies and greater efficiency throughout our new organization.
Source: Seeking Alpha
Exxon will be using those savings to buy back more than $10 billion worth of shares in 2022:
And of course, if oil returns to the $80 area, there remains the possibility that share buybacks will go beyond the $10 billion currently forecasted.
Exxon has made an enviable turnaround in the last 18 months. Much of that progress has been due to increased oil prices, but changes management has made have contributed over that period and will contribute even more heading into 2025.
While the EIA predicts relatively even oil production-demand volumes, others think that spare production capacity is less than the EIA forecasts.
Note current inflation-adjusted CAPEX for all US Energy Stocks is the same as 2000.
And OPEC doesn't look much better as this shows OPEC upstream CAPEX and projects down by more than half since 2017.
Source: Right Wire Reports
So where is all that spare capacity going to come from if not US Energy Producers and OPEC?
All this led J.P. Morgan to predict a $125 oil price in 2022.
"They don't have the barrels. It's a mirage," Malek, head of JP Morgan's EMEA oil and gas research, told the news outlet. "Look back at history. When we're in a scenario where the market goes, 'Oh, s***, we don't have spare capacity,' that's where you see overshoots," he also said.
Needless to say, if oil hits $125, Exxon will almost certainly hit $80 in 2022.
The biggest worry is COVID-19 and its multitude of variants closing down the world's economies like it did in 2020 and early 2021. If that happens, then we will have more problems than oil prices to deal with.
But barring that item, Exxon should hit $80 sometime in 2022
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