Barrons -- Exxon’s new strategy making investors nervous. They should relax .................
Barrons
Dec. 13, 2024
Exxon’s New Strategy Is Making Investors Nervous. They Should Relax.
Exxon Mobil stock has outperformed all of its Big Oil competitors over the past five years. Look for that to continue.
By Avi Salzman
Oil prices are expected to fall next year, a problem for the average oil company. At its investor day on Wednesday, Exxon Mobil made a strong case that it’s not the average oil company.
Next year, Exxon plans to spend more money on oil and low-carbon products like lithium and carbon capture, even as most oil companies are being more cautious. “Compared to our competition, we are in a different league,” Exxon CEO Darren Woods said.
It’s not a league that investors like right now. Exxon stock fell 0.1% on Wednesday and is down 7% in the past month, lagging behind the broader market and its peers. In general, investors don’t like to see oil companies hike their spending. It recalls a bygone era of overinvestment and diminishing returns from a decade ago. That was a miserable time to invest in oil companies, whose returns consistently were in the low single digits or even negative.
Exxon argues that it can spend more on a few high-return projects while otherwise decreasing its cost base. The reason to believe the company is that it’s already done that over the past five years, and the stock has outperformed all of its Big Oil competitors. Between 2019 and 2024, Exxon invested more than its peers, and it paid off: The company has more than doubled its expected earnings and cut its net debt by 70%. As a result, it returned $140 billion to shareholders in the form of buybacks and dividends.
Although things got dicey at the depths of the pandemic, the company has been able to hike its dividend every year. The stock now yields 3.5%, and the company is on track to keep buying back $20 billion in shares a year, or about 4% of its market cap. Those shareholder returns have kept investors happy, even when the level of the company’s spending makes them nervous.
“All else being equal, would you rather see a lower level of spending? Of course,” said Ben Cook, portfolio manager of the Hennessy Energy Transition fund, which owns Exxon shares. “At the same time, very few companies can speak to the rate of return on that capital employed and those returns to investors.”
At $112, Exxon stock is trading at 14 times 2025 earnings-per-share expectations, a discount to its historical average. Absent a price spike driven by war, Exxon won’t see techlike returns anytime in the near future. But it’s proven its worth at volatile moments in the market, including during the tech selloff in 2022.
Part of Exxon’s success was based on luck -- oil prices rebounded quickly from the pandemic depths, and its exploration off Guyana yielded one of the great oil gushers of modern times. Yet it also involved more skillful corporate moves, like plowing money into the Permian Basin, Guyana, and liquefied-natural-gas plants while selling off lower-performing assets. Those moves made the portfolio resilient. Exxon now says it can cover its capital costs and dividend even if oil prices fall into the $30 range.
At oil prices around $65 -- just below today’s levels -- the company says it can increase its earnings at a compound annual rate of 10% for the next six years. By 2030, Exxon’s production of oil and equivalents could rise to 5.4 million barrels a day, from 3.7 million barrels last year.
Cook also likes how Exxon is investing more in new businesses like carbon capture, lithium, and hydrogen. The company expects to spend $30 billion on “lower-carbon” investments by 2030, adding $2 billion in incremental earnings potential.
Exxon has earned credibility from investors over the past five years. The oil market looks wobbly heading into next year, but the stock is on sturdier ground.
Write to Avi Salzman at avi.salzman@barrons.com
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