ExxonMobil: Can This Oil Giant Change Market Sentiment With Green Energy Proposals?
In recent years, ExxonMobil (XOM) has been a bit of a battleground stock for investors. For decades, this was a blue chip company known for generating strong total returns and paying out a generous and rising dividend yield. Some still argue that this is a best-in-breed type company; however, the company’s fundamentals would seem to imply otherwise. While it’s true that the energy industry as a whole has been out of favor for much of the last decade, XOM has seen its balances sheet deteriorate with its cash position dwindling, its cash flows trending towards negative growth, and its debt load rising as the company has been forced to do things like raise debt to sustain its high dividend yield.
The trouble that XOM has experienced is due to oil prices falling off of a cliff in 2014/2015. In January of 2014, crude oil was selling for more than $115/barrel. Well, by January of 2015, the price of a barrel of oil had fallen to below $40. There were investors who expected a quick bounce back from these record low prices, but the price of oil stagnated down in the $50-$70 range until early 2020. And then, when the pandemic hit and global commerce and travel slid to a halt, energy demand fell down to unseen levels in the modern era, leading to oil prices down in the $20/barrel range, which is a price point that the industry hadn’t seen in roughly 70 years.
These low prices obviously didn’t bode well for XOM’s operations and this showed up during the company’s fundamental results throughout 2020. What’s more, Exxon has been forced to sell off assets and reduce its capital expenditures on things like exploration, leading analyst to fear that the company was doing long-term damage to its growth prospects. However, as the economy has begun opening up in recent months we’ve seen a renewed uptick in energy demand, causing the price of a barrel of oil to rise back to pre-pandemic levels in the $60 area. That is still well below the $100+ oil prices that we saw roughly 7 years ago; however, the increase has been like a breath of air for energy investors.
XOM recently reported Q1 earnings, in which it beat consensus analyst estimates on both the top and bottom lines. Exxon generated revenues of $59.15 billion, which was $2.16 billion higher than what analysts thought the company would produce, and represented 5.3% year-over-year growth. XOM also posted GAAP and non-GAAP earnings-per-share of $0.64 and $0.65/share respectively. The GAAP figure was $0.07/share ahead of analyst estimates while the non-GAAP figure beat the consensus number coming into the quarter by $0.05/share.
Most importantly, the company generated $9.3 billion in cash from operations, which meant that both capital expenditures made during the quarter, as well as the dividend, were covered by the company’s cash flows. This allowed Exxon to reduce its debt load by approximately $4 billion during the quarter. Regarding the uptick in cash flows, during Exxon’s first quarter report, CEO, Darren Woods was quoted as saying, “The strong first quarter results reflect the benefits of higher commodity prices and our focus on structural cost reductions, while prioritizing investments in assets with a low cost of supply.”
Overall, XOM was results from its upstream and downstream operations that beat analyst estimates; however, XOM shares still sold off on the news. This appears to be a bit of a classic “buy the rumor, sell the news” situation on Wall Street. Prior to the Q1 results, XOM shares were up roughly 42% of a year-to-date basis. This made the company one of the best performers in the entire market and it appears that investors needed to see even higher growth for the positive momentum to continue. And, as mentioned before, even though XOM’s cash flows were much higher in Q1 than they have been in the recent past, there is still concern amongst analysts that over the long-term, the secular headwinds that the fossil fuel industry faces will continue to present growth headwinds to an oil giant like XOM.
During recent years, we’ve seen other oil giants, such as British Petroleum (BP) and Royal Dutch Shell (RSD.A) discuss plans to reduce their energy emissions with ambitious carbon reduction goals. ExxonMobil joined this movement recently as well, making big news in the carbon capture space.
XOM’s CEO Woods touched upon this during the Q1 earnings report, saying, “We also made progress on our energy transition strategy by launching our new ExxonMobil Low Carbon Solutions business, which is initially working to develop innovative, large-scale carbon capture and storage (CCS) concepts, including the evaluation and advancement of more than 20 new opportunities, such as a multi-industry hub to reduce emissions from hard-to-decarbonize industries near the Houston Ship Channel. As the global leader in carbon capture, we are seeing growing public and private sector support for CCS as a critical enabling technology to reduce emissions and help meet society's net-zero ambitions.”
Our algorithm found a couple of articles written by 4-star Nobias analysts highlighting Exxon’s attempt to expand its renewable/”green” energy ambitions. Financial Buzz recently published an article highlighting a deal between ExxonMobil and Global Clean Energy’s biorefinery in Bakersfield, California. The author said, “Renewable diesel utilized Global Clean Energy’s camelina crop that may significantly reduce life-cycle greenhouse gas.
The president of ExxonMobil Fuels and Lubricants Company, Ian Carr, was quoted as saying, “Our expanded agreement with Global Clean Energy reinforces ExxonMobil’s longstanding efforts to support society’s ambitions for lower-emission fuels. Through our growing relationship, we remain focused on bringing renewable fuels to market that make meaningful contributions to help consumers reduce their emissions.” Financial Buzz said, “Analysis from California Air Resources Board data demonstrates that renewable diesel from no-petroleum feedstocks may provide life-cycle greenhouse gas emission reductions of 40 to 80% compared to petroleum based diesel.” These alternative fuels appear to be a growing part of Exxon’s plans, moving forward, as we continue to head into a future where there is increasing demand for environmentally friendly fuel sources.
Matthew DiLallo recently published this article on nasdaq.com, diving into the carbon capture plans that Woods discussed above. DiLallo said, “The $100 billion investment would capture the carbon emissions of refineries and petrochemical plants along the Houston Ship Channel, a key oil industry hub, and permanently store them underground. The initial phase, which Exxon could complete by 2030, would capture 50 million tons of carbon dioxide per year, the company says, roughly the equivalent of removing 11 million cars from the road.” DiLallo mentioned that in a recent interview with Politico,
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Woods touched upon his belief that “massive project” that Exxon is proposing is “the only realistic way for the U.S. to get anywhere near the kinds of quick, aggressive cuts to the nation's greenhouse gas output" that the Biden administration wants to see occur moving forward. DiLallo says that carbon capture technology is key to the future of the oil industry, noting that “It could enable the industry to deliver on its ambition of producing net-zero oil, where investments to reduce and capture carbon emissions would completely offset the emissions caused by the production and combustion of a barrel of oil.”
There has been push back amongst environmentalist who believe that energy executive and politicians alike should be focused on other energy sources that are truly emission-free; however, it’s going to take decades to wean the world off of its fossil fuel dependency so there appears to be a large opportunity for companies like Exxon to potentially profit from carbon capture and storage while technology innovation continues to occur that might lead towards more reliable and affordable alternative energy sources. DiLallo mentions that for the carbon capture system to work for companies, “governments would need to create the right financial incentives to make CCS projects economical, such as a cap-and-trade system or economywide carbon tax.”
Without financial incentives, it’s unlikely for these investments to offer attractive enough profits for large corporations to pursue them. Because of this, there is a lot of uncertainty surrounding Exxon’s large proposal and its long-term clean energy plans. DiLallo concludes his piece saying, “With the Biden administration currently seeking to set a clean energy standard instead, it's unclear if Exxon's proposed project will become a reality.” Because of this, investors aren’t likely to put a lot of weight on Woods’ grand proposal and therefore, it may be difficult for XOM to overcome the secular headwinds that the fossil fuel industry faces.
Disclosure: Nicholas Ward has no positions in any equity mentioned in this article. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.