Hands up folks, who had Exxon Mobil (XOM) to be inside the top-ten S&P 500 performers at the start of the year? Well, that’s where it is; up around 30% year-to-date, the oil giant finds itself in 5th or 6th spot at time of writing. Sure, the year is still young, and there’s plenty of time for that to change, but few would begrudge Exxon its time in the sun given how tough the past decade has been here.
Of course, that recent bout of outperformance hasn’t occurred in a vacuum. Almost all of the top 15 performers are related to oil & gas in some way, as the macro tables have now very much turned in the industry’s favor. For Exxon, that also means billions of dollars in post-dividend free cash flow is hitting the corporate coffers now that oil trades for circa $95/bbl, along with everything that entails – buybacks, debt reduction, and so on. It’s a far cry from how soft things looked back in 2020.
Where does that leave the stock going forward? Clearly it’s not the standout buy it was for most of that year; such is the nature of cyclical beasts, though I don’t think it is wildly expensive either, even after accounting for the period of ‘over-earning’ that is about to occur. Whether that makes it a “buy” or not is perhaps a slightly different question, with those that bought during the slump perhaps understandably less inclined to add right now.
The Macro Picture Brightens
Exxon has been under the cosh for a lot of the time it has featured here. Yes, there was obviously the horrible downturn in 2020, but there was also a bit more to it than that. The CapEx bill was coming in high for one, with the firm previously planning on annual investments in the $30-35b area as it looked to boost production and bring on a slew of big projects across its vast empire. Combined with lackluster cash flow, that meant debt concerns were starting to weigh on the balance sheet. ESG worries have likewise been a drag on sentiment, with that also showing up at boardroom-level, not that it really matters much for value investors.
In terms of operations, the macro picture has really brightened up. Brent averaged around $70/bbl last year (versus just over $40/bbl the year before), and trades in the $95/bbl area as I type. Natural gas prices have gone in the same direction, with Henry Hub gaining 100% year-over-year in Q4 and international realizations up even more. That led to a massive bounce in Upstream segmental earnings, which came in at $15.7b for the full-year versus a $20b loss in 2020. Stripping out asset impairments, Upstream annual earnings increased by around $16b year-on-year, with higher realized prices more than offsetting a slight dip in production, which averaged 3.712mmboe/d.
It was a broadly similar story in the Downstream and Chemicals segments, with margins perking up and earnings coming in strong. Downstream profit was circa $2b for the full-year, up from a loss the year before, as refining margins improved significantly and volumes rose. Chemicals posted record profit of $7b, again on the back of much stronger industry margins and higher volumes.
Into Cash Printing Mode
All said, the above made for a bumper year with respect to profit and cash flow. Net income clocked in at $23b (~$5.40 per share), up from a circa $2b underlying loss (i.e. stripping out asset impairments) in 2020. That was Exxon’s highest annual profit print since 2014.
Excluding changes in working capital and cash from asset sales, cash flow from operating activities was just over $44b. That was up from $14.7b in 2020, and the highest cash flow figure since 2012. Free cash flow swelled to around $30b, with the firm basically in cash printing mode on account of massively reduced CapEx. Capital expenditure came in at $16.6b, but will increase to between $21b and $24b this year. Debt fell by almost $20b, while the company also commenced its $10b buyback program last month (scheduled to run over the next 12 to 24 months). The quarterly dividend has also ticked up to $0.88 per share since the stock last featured here, thereby maintaining ‘aristocrat’ status (39 years of consecutive annual growth and counting).
Shares Somewhere In The Fair Value Area
At the business level, there’s still a lot to look forward to over the next few years as the firm’s projects start to bear fruit. That will see the ramping up of production in the Permian and Guyana, as well first oil from Bacalhau in Brazil, with double-digit returns seen as low as $35 per barrel of oil equivalent. CapEx guidance has, of course, been massively trimmed these past couple years – to the tune of around $40b out to 2025 – with overall Upstream production levels now seen flat mid-decade versus last year, though portfolio high-grading is slated to help out significantly in terms of cash flow growth.
Downstream and Chemicals will likewise lean on high-grading, with output seen shifting to higher-value products. There are also decent organic growth prospects to be had there, certainly in areas like high performance polymers. Finally, there’s also a bit left to trim from the 2023 $6b OpEx reduction plan, with the company booking $2b in savings last year on top of the $3b posted the year before.
Anyway, back to the current valuation, which I still don’t think is that aggressive despite the stock returning over 60% since last coverage. Analysts see 2022 net income at $27b according to my screen, equal to circa $6.60 per share and a PE of 12 based on the current $80 share price. Of course, macro conditions look good now, so there’s the chance of an earnings trap when taking that valuation at face value. With that, right-sizing earnings to mid-cycle conditions and incorporating discounted 2025 free cash flow growth gives me a fair value of around $80 – roughly where we are now. The stock isn’t as compelling as it was the last few times I covered it, but it’s not that expensive either.
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