Energy markets are experiencing high volatility, where energy companies' long-term outlooks are subjected to economic uncertainties. In this analysis, we explore Exxon Mobil Corporation's (XOM, Financial) fundamentals to determine its sustainability and growth potential.
Growth outlook and issues
To begin with, Exxon Mobil aims to double its earnings and cash flow by 2027 by focusing on mix improvements, structural cost efficiencies and volume growth from strategic projects. Mix improvements should increase the proportion of higher-margin products, accounting for 50% of the earnings improvement. Structural cost efficiencies are set to account for 30% of the total, targeting $9 billion in cost savings by 2023, while the remaining 20% will come from volume growth in strategic projects. These include expanding upstream operations in Guyana, Brazil and the U.S. Permian Basin and investing in downstream facilities. Exxon Mobil aims to achieve a 14% return on capital employed (ROCE) in 2025 and a 17% ROCE in 2027 through capital discipline and operational efficiency.
As per an Energy Information Administration (EIA) report, the Brent crude oil spot price is expected to average $85 per barrel in the first half of 2023, but is forecast to fall to an average of $82 per barrel in the second half of the year and $78 per barrel in 2024 due to persistent global oil inventory builds resulting from global oil production outpacing demand. Global oil demand is expected to increase from an average of 99.4 million barrels per day (b/d) in 2022 to 102.3 million b/d by 2024, driven by growth in China and other non-OECD countries, but uncertainties surround the demand forecast due to evolving macroeconomic conditions and China's pivot away from a zero-Covid strategy. Global liquid fuel production averaged 100.0 million b/d in 2022 and is projected to increase by an average of 1.1 and 1.5 million b/d in 2023 and 2024, with growth in non-OPEC production and OPEC output offsetting a decline in Russia's production.
Source: eia.gov
However, natural gas prices remain volatile, with extreme weather events and production freeze-offs potentially causing price spikes. The Freeport LNG export facility could be online in the first quarter of 2023 and add over 2 billion cubic feet per day (bcf/d) of natural gas demand to the U.S. market. U.S. natural gas production growth surpasses demand growth, reducing natural gas prices, and is expected to average between 100 bcf/d and 101 bcf/d in 2023. Finally, natural gas storage inventories are expected to end the withdrawal season at more than 1.8 trillion cubic feet, 16% above the five-year average, reducing natural gas prices in 2023.
Therefore, the forecasted decrease in oil prices and potential reduction in natural gas demand could negatively impact Exxon Mobil's revenues and profits. Lower oil prices could result in lower revenue from its upstream exploration and production business. At the same time, decreased natural gas demand could impact the company's downstream operations, such as refining and chemicals.
Furthermore, a decline in energy prices and demand could also affect Exxon Mobil's market valuations. As a result, investors may become more cautious and risk-averse, leading to decreased demand for Exxon Mobil's stock and a potential reduction in its market value. However, Exxon Mobil's plan, based on strategic investments, structural cost savings and improved operational performance, should result in improved financial performance for the company.
Reinvestments in efficiencies
Exxon Mobil's reinvestments reveal its focus on sustainability and growth while addressing the changing energy landscape. The company's upstream investments emphasize low-cost, high-return, lower-emission intensity projects, primarily in the Permian, Guyana, Brazil regions. As a result, the company aims to reduce the 2030 greenhouse gas intensity of its upstream operations by 40–50%.
Additionally, the company plans to sustain production levels soon, offsetting divestments and the Russia exit impact. The 2023 production outlook is estimated at approximately 3.7 million barrels per day, with more than 50% of production coming from strategic assets with a $9 per barrel earnings advantage compared to the base portfolio.
Furthermore, Exxon Mobil's product solutions investments focus on delivering over $4 billion in annual earnings potential while enabling growth in high-value products. The company seeks to double the volume of high-value products with differentiated performance, launch lower-emission fuels, expand high-value lubricants and grow performance chemicals. In addition, the product solutions division aims to triple its earnings by fully leveraging its unique competitive advantages, including the world's largest fuels, chemicals and lubricants manufacturing scale and global footprint.
Exxon Mobil is also increasing investments to support emission reductions, with a 15% increase in lower-emission investments to over $15 billion. The company focuses on reducing its emissions and those of others by advancing CCS, hydrogen and lower-emission fuel projects globally where supportive policies exist. In addition, the benefits of the U.S. Inflation Reduction Act are expected to expand third-party market opportunities and improve investment returns to decarbonize the company's operations.
Interestingly, the company's breakevens are expected to improve over the long term, although near-term breakevens may be impacted by Capex timing, affecting the company's profitability.
Progress toward carbon neutrality
To address environmental sustainability, deploying Honeywell's (HON, Financial) CO2 fractionation system at Exxon Mobil's Baytown facility is a significant step towards reducing carbon emissions and producing low-carbon hydrogen. The project's potential to capture about 7 million tonnes of CO2 annually and deliver low-carbon-intensity hydrogen could position Exxon Mobil to compete in a future low-carbon economy.
However, the project's success will depend on various factors, including the cost-effectiveness of the technology, government policies supporting carbon capture and storage and the demand for low-carbon hydrogen. Lastly, the project could help improve Exxon Mobil's financial performance and market valuations over the long term by enhancing the company's reputation as a responsible and sustainable energy provider. However, there needs to be more certainty regarding the time frame for the project's profitability and the potential risks associated with investing in new and untested technologies.
Source: McKinsey & Company
New extraction fields
The Uaru-Mako project is expected to add 1.3 billion barrels of oil reserves to the already estimated 10 billion barrels in the Guyana-Suriname basin, a consortium led by Exxon Mobil is developing. The project is currently under review, and if approved, it could go online within the next three years.
Adding Uaru-Mako would mean an increase in the number of wells, boosting production for the consortium. The consortium's licenses cover the Caribbean region, about 120 miles offshore near Guyana's maritime border with Suriname. The project could also lead to the construction of a fifth FPSO (floating production, storage and offloading) vessel to fill tankers for international markets.
Moreover, the Uaru-Mako project would positively impact Exxon Mobil's long-term growth. The company has invested heavily in the Guyana-Suriname basin and has successfully extracted oil from the region. However, there are concerns that the Guyanese government may seek better terms from the consortium, as the country earned only $1 billion last year from its portion of the production-sharing agreement with the consortium, which is well below industry norms. Therefore, if the government were to renegotiate the terms of the deal, it could negatively impact Exxon Mobil's long-term growth.
Takeaway
To conclude, Exxon Mobil navigates a rapidly changing energy landscape by investing in sustainability, operational efficiency and growth. The company's strategic investments aim to reduce greenhouse gas emissions, increase earnings and provide reliable, affordable, low-emission energy. However, potential market risks such as lower oil prices and investor caution may impact Exxon Mobil's valuations. Nevertheless, with projects like the Uaru-Mako oil reserves and Honeywell's CO2 fractionation system, Exxon Mobil looks to be positioning itself to compete in a low-carbon future while delivering shareholder value.
