Exxon Mobil is the dividend leader of American oil and gas

Ticker: XOM

Author: Stock Analyst  Date: 2021/03/24

Exxon Mobil is the largest oil and gas company in the United States and the world's second largest oil and gas company by capitalization. Exxon has a diversified portfolio of assets in the oil and natural gas upstream and downstream, petrochemicals and LNG sectors.

We rate Exxon Mobil Buy with a target price of $ 63.8. Potential including dividends is 20.3% in 12 months.

  • Exxon Mobil has been raising dividends for 37 years and is a dividend aristocrat. Dividend yield over the next 12 months expected at 6.2%.
  • The company is optimizing operating expenses, which, together with the implementation of new projects, should bring in $ 8-11 billion of additional operating cash flow in 2025 relative to the company's forecast for 2021.
  • The pandemic's underinvestment in the oil and gas industry creates a favorable environment for companies that continue to invest in production support, such as Exxon Mobil.
  • About 90% of new projects pay off when oil prices are less than $ 35 per barrel, which makes the company competitive even in the event of a decline in oil prices.

Company description

Exxon Mobil is the largest American oil and gas company. At the moment, it is the second largest public oil and gas company in terms of capitalization after Saudi Aramco. Exxon produces about 3.8 mmbp. n. e. oil and natural gas per day. The company's mining assets are located in more than 40 countries. In addition to the upstream, the company is active in the segments of oil refining, petrochemicals and LNG production.

Refining capacity at the end of 2020 amounted to 3,755 thousand b / d and is concentrated primarily in the United States and Europe. The main products of oil refining are standard gasoline, naphtha, kerosene, diesel, bunker fuel, jet fuel, etc. In the same regions, the main sales of these oil products take place.

In addition, Exxon Mobil is participating in a number of LNG JVs with a combined capacity of 86 million tonnes - nearly a quarter of the world's LNG demand.

Development strategy

Exxon Mobil is one of those companies that, unlike European oil and gas majors, are not going to actively move away from oil production towards renewable energy sources (renewable energy sources) in the near future.

In its presentation, Exxon Mobil notes that in 2020 the oil industry began to suffer from underinvestment, as a number of companies (and even Exxon Mobil itself) reduced their investments in drilling and exploration. Moreover, many companies that are considered one of the leaders in the global oil and gas industry (BP, Total, Equinor, etc.) have begun to actively develop renewable energy sources instead of their traditional oil and gas.

Against this background, Exxon's management believes that even with rather pessimistic demand scenarios, which imply an active shift away from oil consumption in the framework of combating climate change, it is impossible to throw investments in oil production, as this will lead to a shortage. Therefore, Exxon Mobil plans to be one of the companies that will continue to invest in oil production, and its main development projects are in this area.

One of the main sources of growth for Exxon Mobil is the development of the project in Guyana. Exxon's share in the project is 45%, and he is its operator, the remaining 30% and 25% are held by the American Hess and the Chinese CNOOC, respectively. Here are the main goals and facts about the project:

  • By 2026, production will amount to over 750 thousand bp. n. e. against 120 thousand b. n. e. at the moment.
  • The reserves in 2020 were 9 billion bp. n. e.
  • By 2025, it is planned to reach $ 3.5 billion in operating cash flow at an oil price of $ 50 per barrel.
  • The IRR of the project is estimated at over 20% with oil prices above $ 50 per barrel.
  • The break-even point for different parts of the project is at $ 25-35 per barrel - extremely competitive values.

The next priority for Exxon Mobil is to increase production in the Permian Basin, one of the company's central assets in the United States and the largest shale oil producing region in the states. The plans for the next 5 years are as follows:

Production growth by 2025 to 700 thousand bp. n. e per day against 370 thousand in 2020.
Achievement of operating cash flow of $ 4 billion by 2025 with oil prices of about $ 50 per barrel.
IRR is above 10% even when oil is below $ 35 per barrel.

At the same time, it is important to note that Exxon does not plan to increase overall production: according to the company's plans, in the next 5 years it will remain at the level of 3.7 million bp. n. e. per day (taking into account plans to sell some assets). Efforts in the coming years will be primarily aimed at replacing old and inefficient mining assets with new ones with a lower cost. Other strategic directions for Exxon Mobil's development include the following:

  • A structural decrease in operating expenses by $ 6 billion by 2023, 2.5 of which will be due to the optimization of refining and petrochemicals.
  • Support for dividends at a level not less than the current one, as well as reducing debt when oil prices are above $ 50 per barrel.
  • Growth in operating cash flow at an oil price of $ 50 per barrel from approximately $ 32 billion in 2021 to $ 40-43 billion in 2025 due to the launch of new projects, cost optimization, and normalization of the refining and petrochemical margins.
  • Reducing the break-even level, taking into account the payment of dividends, to approximately $ 45 per barrel by 2025 from $ 50 per barrel in 2021.
  • Reducing greenhouse gas emissions by 30% by 2025.

Dividend policy

Exxon Mobil is a dividend aristocrat and has been raising dividends for 37 years. Expected dividends per share in the next 12 months are $ 3.49 per share, which corresponds to a 6.2% dividend yield.

The stability of dividends, despite the difficult situation on the oil market, is beyond doubt at the moment - Exxon Mobil has enough oil prices of about $ 45-50 per barrel to earn enough free cash flow to pay dividends without attracting debt. As production in the Permian Basin and Guyana grows, operating costs are optimized, and refining margins recover, Exxon Mobil is likely to move to a gradual increase in dividends of 10-15% per annum from 2023. Until then, in our opinion, growth will be formal - about a cent per year to maintain the status of a dividend aristocrat.

Industry trends

The oil market is now recovering from the pandemic. Prices have already fully recovered and are now trading at the levels of last year's winter - about $ 65 per barrel.

At the same time, it is important to understand that a rise in prices does not mean a complete recovery of the market from the effect of the pandemic. The main driver of price growth was the OPEC + restriction, which is currently removing about 8 million bpd from the market, taking into account the voluntary production cut by Saudi Arabia. Given the recovery in demand to around 96 Mb / d (versus 100 Mb / d before the pandemic), this creates a deficit of about 2 Mb / d, which helps to gradually reduce stocks to normal levels. However, the OPEC + decision to increase production or a sharp increase in drilling activity in the United States may lead to a drop in oil prices, which is currently the main risk when investing in oil and gas companies. A full recovery in demand is expected only in early 2022.

Attractiveness factors

  • Exxon Mobil is one of the most dividend-paying companies in the oil sector and the US market in general. Dividend yield in the next 12 months is expected by 6.2% and in 2-3 years may move to growth with stable oil prices.
  • The management is actively working to optimize costs, as a result of which for the period 2021–2025. operating cash flow may grow by $ 8-11 billion. Growth in operating cash flow with a moderate level of investment may become the basis for an increase in dividends and a reduction in debt burden.
  • Exxon Mobil is a leader in the US and global oil and gas sector. This gives the company the opportunity to take part in projects anywhere in the world, as well as always have access to cheap financing. In particular, in 2020, this allowed the company not to reduce the level of dividends.
  • Reduced investment in exploration and drilling from oil and gas companies around the world creates long-term prospects for higher oil prices and an increase in the market share of companies adhering to the strategy of developing classic oil and gas projects.

Risk factors

  • The main risk factor is a decline in oil prices due to increased production from OPEC + or other oil producers.
  • In the long term, oil demand could fall faster than expected if the transition to renewables occurs quickly enough.
  • Pressure from ESG investors and regulators could force Exxon Mobil to spend more on greenhouse gas emissions and other green initiatives.
  • The lack of opportunities for significant production growth limits the potential upside, given the stability of oil prices.

Financial results

Exxon Mobil's financial results in 2020 were under pressure from low oil and gas prices, as well as low refining and petrochemical margins. In April 2020, oil prices even went into negative territory due to the filling of storage facilities in the United States, which is one of the main sales markets for Exxon Mobil.

Against this background, revenue for the year decreased by 31.5%, EBITDA by 54.2%, while net profit and free cash flow went into negative territory, even despite the optimization of operating and capital expenditures. The financial results were also negatively affected by a decrease in hydrocarbon production from 3.95 million bp. n. e. in 2019 to 3.75 mln bp. n. e. in 2020.

In order not to reduce the level of dividends, Exxon Mobil slightly increased its net debt, as a result of which the debt burden increased to 3.5x Net Debt / EBITDA, which is a fairly high value. However, we expect that in 2021, primarily due to EBITDA growth, the debt burden will decrease to 1.6x EBITDA, which is a comfortable level.

It is worth noting that in the 4th quarter the company was able to reach positive values ​​of FCF and net income (excluding the impairment loss), and we expect this trend to continue in 2021 as demand and prices for hydrocarbons recover.

Valuation

To evaluate the company, we used multiples relative to peers, which gave a target capitalization of $ 270.2 billion, or $63.80 per share.

Including dividends in the next 12 months. of 6.2%, the target price of $ 63.80 assumes an upside of 20.3%, which is in line with a Buy rating.

Note that the weighted average target price for a sample of analysts with a higher than average historical performance of forecasts for this share is, according to our calculations, $ 61.25 (upside 9.6%), the share rating is 3.0. (A rating of 5.0 corresponds to a Strong Buy recommendation, and a rating of 1.0 corresponds to a Strong Sell recommendation.)

This includes the target price of Exxon Mobil shares by Wells Fargo analysts at $ 65.0 (recommendation - Buy), HSBC - $ 66.0 (Buy), Piper Sandler - $ 49.0 (Hold).

Stock market performance

Since the beginning of 2019, Exxon Mobil shares have performed marginally worse than its main closest counterpart, the US oil and gas major Chevron and the XLE oil and gas ETF. In our view, this dynamic was due to the fact that investors were not confident that Exxon Mobil would be able to generate enough free cash flow to maintain a high level of dividends while continuing to invest in development. However, now that OPEC + and the recovery in demand are steadily holding prices above the $ 50 per barrel required for Exxon Mobil, we believe that the oil and gas giant's shares can catch up with their peers.