Why Exxon's Oil and Gas Focus Makes Sense
The strategy won't win praise from environmentally oriented investors, but Morningstar's analyst thinks it'll likely be more successful--and less risky.
While many of its peers have announced intentions to divert investment toward renewables to achieve long-term carbon intensity reduction targets, ExxonMobil (XOM) remains committed to oil and gas. It has responded to calls to bring in more outside voices to its board and announced emissions reduction targets. It is also investing in low-carbon technologies, but each of these efforts is measured and keeps oil and gas production at the core. While its strategy is unlikely to win praise from environmentally oriented investors, we think it’s likely to prove more successful and, paradoxically, likely holds less risk.
The end of oil is likely to occur, but not anytime soon. Furthermore, gas is likely to have an even longer life thanks to the relative attractiveness of its emissions intensity to coal for power generation and the need to supplement intermittent renewable power. These trends along with growing demand for chemicals is what drives Exxon’s investment strategy and will likely deliver superior returns.
To satisfy investors, however, the company has reduced previously aggressive spending plans by over 30% to $20 billion-$25 billion for 2022-25, which should keep the dividend safe at $50/barrel oil. Earnings should still grow, however. In fact, after pushing back the timing to 2027, management recently said that the target of doubling earnings by 2025 to about $30 billion is achievable, thanks to progress on structural cost efficiencies and project outperformance.
Production will remain flat through 2025, but portfolio profitability is set to improve thanks largely to high-margin Guyana volumes backfilling declines in North American dry gas production and lower-value divestments. Exxon’s high-quality Permian position, which affords capital flexibility and generates free cash flow, could add 300 thousand barrels of oil equivalent per day by 2025.
Exxon’s downstream and chemical segments have suffered from decade-low industry margins in the recent past, but market conditions are beginning to revert to midcycle levels, lifting earnings. The company’s investments will focus on producing higher-value lubricants and diesel in the downstream segment and performance products in the chemical segment, which should lift returns and earnings further.
Allen Good does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.