Exxon Mobile (NYSE:XOM) announced a blowback quarter with some of the biggest gains in its history and a low double-digit P/E ratio. The company announced a massive expansion of its share buyback program to $30 billion. As we will see everywhere This article, the company’s physical assets, low breakeven cost, increased relevance, making it an incredible stock for a high-inflation environment.
Exxon Mobil has one of the most unique and comprehensive global asset portfolios.
Exxon Mobil’s strong asset portfolio is evidenced by the recent addition of more than 1 billion barrels of reserves to its Guyana assets with 3 new discoveries. The Company has the largest contiguous development in the Permian Basin and has built a unique asset portfolio with massive acreage of its own.
The company’s efficient scale and assets here means it can generate double-digit returns at <$35/barrel, which is well below current prices. We expect the company to ramp up production and remain focused on asset development here. By 2027, production is projected to nearly double from current levels to 1 million barrels/day.
In Guyana the story is similar. The Company’s permitted Guyana projects, which will bring production to 800,000 barrels per day, consume only 40% of the Company’s reserves. The Company continues to make new discoveries and ramp up production while maintaining incredibly low breakevens of around $30/barrel.
Overall, the company has a unique and cost-effective asset base.
Results for the first quarter of 2022
Exxon Mobil posted impressive earnings in Q1 2022, despite a nearly $4 billion writedown on the company’s exit from Russia.
Result – investor presentation
Exxon Mobil had strong earnings and a P/E of <11, not counting one-offs like the billion-dollar impact of the company's exit from Russia. The company has continued to invest heavily in its business, with a full-year target of $21 billion to $24 billion in capital expenditures and ongoing structural savings. Both things have the ability to expand opportunistically.
As a sign of the company’s financial strength, the company earned $9.9 billion in FCF with $4.3 billion in cash, both after distributions to shareholders and some debt reduction. The company spent $5.8 billion on distributions to shareholders, including approximately $1.9 billion on share repurchases, or >0.5% of the company’s outstanding shares.
The company’s double-digit FCF yield with significant shareholder returns demonstrates its financial strength.
Continued evolution of Exxon Mobil
ExxonMobil continues to evolve.
Continuous Development – Investor Presentation
The company is now treating low-carbon solutions as an important aspect of its portfolio. Exxon Mobil now admits that the transition to lower emissions is imperative and the company has a unique ability to be a part of this process. In concrete terms, the company can benefit both from the switch from coal to natural gas and from CO2 capture.
Coal is no longer the cheapest form of electricity. Natural gas is cheaper, and in the right environment, many renewable energies are cheaper too. While renewable energy plus storage can help meet variable demand, core energy needs still have to come from somewhere. Because coal is more polluting and nuclear is not preferred, natural gas represents a strong option.
When it comes to carbon capture, Exxon Mobil is the world leader in carbon capture. Capturing carbon and storing it for thousands of years or more allows humanity to acknowledge that some activities essential to our lifestyle are harmful to the environment. We expect large-scale carbon capture to be part of the solution, and Exxon Mobil is well positioned to deliver.
Exxon Mobil’s contribution to our lifestyle
One of the important factors in Exxon Mobil’s longevity is the company’s important contribution to the way we live our lives. While debates about oil, climate change, consumption and the format of fuel may rage on, one thing is clear. Energy in various forms is indispensable for our modern standard of living.
Natural gas is a lower emissions fuel (compared to coal) and incredibly energy dense. With LNG, it is becoming increasingly portable. Exxon Mobil is expanding into the renewable energy space, as described above, and the company has the project expertise, know-how and capital resources to continue growing in the renewable energy space. This contribution to our lifestyle means Exxon Mobil will be around for a while.
Cheap oil stocks
In an environment of high inflation, the market traditionally moves towards real assets. Real estate and crude oil are two examples.
So the question becomes, why invest in oil stocks? The reason is the rating. Crude oil is recovering from a multi-year recession, with prices breaking above $100/barrel for the first time since mid-2014. This is despite cumulative inflation totaling around 23% since early 2014, which has pushed the value of the dollar down significantly.
This slow recovery, coupled with investor concerns about the industry, means many crude oil stocks are still trading at incredibly low valuations. Exxon Mobil is targeting $30 billion in annual share buybacks over two years and is barely in the double-digit P/E ratio. This means that not only are these companies able to handle inflation, but they are also trading at incredibly low value.
The biggest risk to our thesis is crude oil prices. Prices have previously been incredibly volatile, even if the macro environment is favorable to gains, and there is a possibility that production could increase significantly in the current high-price environment. That could drive prices lower and hamper continued yields.
Exxon Mobil’s stock price has rallied significantly over the past year as crude oil prices have recovered. However, as the company’s recent results show, that strength is justified. The company trades at a low double-digit multiple with a manageable debt load. It comfortably shrugged when it had to leave the Russian markets.
The company is focused on continued shareholder returns and has significantly expanded its buyback program to $30 billion. The company’s assets have a unique ability to outperform in the current hyper-inflationary environment and with the company’s valuation, this helps strengthen the company as a long-term investment.