Read us and find out if Exxon Mobil is a good investment idea
XOM, formed through the merger of Exxon and Mobil in late 1999, is the world's largest publicly traded integrated oil company, excluding Saudi Aramco
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The Business
In July, XOM reiterated its 2021 capex budget of $16 billion to $19 billion (versus $21 billion in 2020), likely near the low end -- despite the recent recovery in crude prices. We initially saw the choice to slash capex as a means of protecting the dividend, which chews up $15 billion annually. Now, we see XOM staying the course with relatively low capex, to enable more debt reduction. We estimate that XOM has repaid about 33% of the incremental debt it took on since the end of 2019. Second-quarter 2021 results were solid in both upstream and chemicals, although refining margins remained on the weak side. The medium-term outlook (to 2025) has growth potential from offshore projects in Guyana, Brazil, Mozambique, and Papua New Guinea. We forecast XOM can protect the dividend at a Brent price of $50/barrel, and that looks very doable for 2021, based on EIA projections. As of July 2021, the EIA projects West Texas Intermediate crude oil averaging $66/barrel in 2021, and $63/barrel in 2022. The biggest nearterm headwind in our view appears to be refining margins, which need stronger energy demand to recover, and could relapse due to the arrival of the Delta variant.
At its most recent annual Investor Day event (March 2021), XOM expected production, ex-divestitures, to be about 3.7 million boe/d in 2021, and likely staying flat in 2025. This in our view is the most notable change from prior Investor Day events, where the production outlook for five years’ distant was roughly 5 million boe/d. However, the trade-off is that XOM is likely to spend considerably less money overall, helped by cuts in short-cycle work such as unconventional oil in the U.S. Lower 48. We expect XOM’s total capital spending in 2021-2025 will be about $40 billion lower than previously anticipated, or about 27% less. The major capital projects remain centered around Brazil and offshore Africa, complemented by the Permian Basin and the Golden Pass LNG development in the U.S. Gulf Coast. Capital spending peaked in 2013 at $42.5 billion, but in the immediate aftermath of the 2014 oil crisis, XOM pulled in the reins considerably. In 2019, capital investment was $31 billion, and initial guidance for 2020 originally indicated $32 billion, before being slashed more than 30% to $21.4 billion in 2020. As of March 2021, XOM forecasts 2021 capital spending in a range of $16 billion to $19 billion
Investment Case
Our opinion is Buy. While XOM occupies a leadership position in the industry due to its sheer size, its once-pristine balance sheet has been weakened due to the pandemic. We see the major inflection point for earnings starting around 2024, with projected first oil of its Payara field in Guyana. For income investors, questions over the dividend ultimately come down to a timing question: will energy markets sustain the recent recovery in the second half of 2021, or relapse? Based on impressive supply discipline (so far) from both the OPEC+ consortium and from the U.S. community, we think the recovery persists. Risks to our opinion and target price include a deterioration in economic, industry, and operating conditions (such as difficulty replacing reserves and increased production costs); unfavorable regulatory decisions; inability to achieve desired non-core asset sales; an unexpected dividend cut; and fasterthan-expected supply growth across the industry.
Our 12-month target price is $64 + 6.30 % dividend yield . This reflects a 7.0x multiple of price-to-projected 2022 cash flow, a modest discount to XOM’s historical forward average, and reflective of pandemic risk.
Our risk assessment is MEDIUM. Reflects our view of the company’s diversified business profile in volatile, cyclical, and capital intensive segments of the energy industry. The company also has a long track record of dividend enhancement, a strong balance sheet, and a management culture that focuses on long-term development. However, the industry as a whole also faces considerable regulatory risk and potential for ESG investing advocates to eschew investments in fossil fuel companies.
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+Active portfolio risk management to avoid moments of high volatility in the market such as during the month of March 2020 and then quickly it was reinvested 100% after this moment.
+All portfolio movements will be alerted when they are made.
+This strategy accumulates a profitability greater than 80.00% measured in US Dollars in 2020.
+Our 12 .500% Return Quant Algo since 2006 for your Trading Strategy.
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