Description

XOM at $59.88 offers a relatively safe 6% dividend yield and 25% upside to my 24 month price target of $75.  I view XOM as much as a macro/yield/policy investment as a fundamental financial investment.  

XOM on 2022/2023 consensus trades around 6x EV/EBITDA, has projected end of 2021 net debt of 1x and generates significantly more cash flow than the dividend payout. My valuation of $75 assume that XOM trades at somewhere between 4.5-5 % dividend yield.  That is higher than the dividend yield on HYG, the etf for high yield debt.  

I view XOM and nearly every other integrated and other quality energy companies as similar to tobacco companies.  They are fundamentally tainted and hated by the market regardless of their cash flow generation.  Tobacco kills millions while carbon based energy fuels the modern global developed and developing world.  Tobacco is highly additive while energy is subject to the whims, geo politics and the strategic goals of MBS in Saudi Arabia, Xi in China and Putin in Russia.  

XOM management and corporate status as one time largest market cap company in the world as recently as 2013 has been humiliated by the financial markets in the last 5 years.   Energy has simply been a tough space in a world of covid and Saudi Arabia regularly attacking US producers in price wars. Same time it has become a twin to tobacco in the global public policy arena.

Here is XOM falling inline with climate change and Paris Accord 

https://corporate.exxonmobil.com/-/media/Global/Files/investor-relations/analyst-meetings/2021-ExxonMobil-Investor-Day.pdf

XOM dividend policy 

https://corporate.exxonmobil.com/Investors/Investor-relations/Dividend-information

Institutional shareholders calling out XOM and sending a wake up call to management 

https://www.bloomberg.com/news/articles/2021-06-02/exxon-activist-seen-winning-third-board-seat-in-preliminary-vote

This was what the activist with no real ownership but with backing and votes for large shareholders of XOM is pushing 

https://reenergizexom.com/wp-content/uploads/2021/05/Investor-Presentation-May-2021-v2.pdf

View on Energy 

I expect the US govt under democratic administrations, US consumers/public in all political scenarios, Western Europe and Japan to move away from oil.  I expect China to give lip service to reducing carbon.  I expect India to use  declining oil consumption in the west as a means to acquire cheaper oil and I expect rest of the developing world to follow India’s path. 

I expect Saudi Arabia to produce and continue to be the opposite of what it has historically been a stabilizer of oil prices.

Where XOM fits in 

XOM and other integrated oil firms are shrinking and will continue to shrink as their investor base expects a transition away from carbon.  I don't know how you can transition a company like XOM into some new green energy company. 

Given XOM dividend policy and balance sheet I expect XOM management to be focused on 2 key strategic policies 

Pay the dividend 

Delever the balance sheet 

After those two policies, XOM management will kicking and screaming start to focus on some green projects and new low carbon cap ex.  Given a choice between green projects and paying down debt, management will focus on paying down debt.  

XOM is going to be a boring company paying dividends and trying to optimize its existing asset base.  Majority of other majors and energy companies are also being forced by existing investors to focus on optimizing existing assets and transitioning to a green low carbon world that should result in a great oil price environment for producers regardless of what Saudi Arabia’s MBS strategizes.  

A boring low capex/low production growth business model is ideal for XOM and its shareholders.  Generate cash and return it to shareholders via dividend and reduced debt.  I don’t expect any buybacks.  

Risks 

Saudi Arabia is the opposite of what it used to be, a stabilizing force in oil.  Now it is a unstable state and can on a whim start a price war as it did in 2020 in the midst of the Covid global economic shutdown. 

Marco growth matters to commodity prices and a Saudi Arabia that is more likely to start a price war in a economic downturn.

Price Spike.  Oil prices spiking due to producers not investing given all the destruction of capital in last decade and a strong global economy is a real risk.  Also global energy supply and transport lines are fragile as seen recently in UK retail gasoline markets and European natural gas.  The short term risk is government and political intervention.  The bigger longer risk is any sustained energy spike accelerates the move away from oil.  

Increased growth capex.  XOM management going back to its old way is a risk.  A high commodity environment creates an inventive to seek growth but given the activist in the name I don’t expect  XOM to go in a growth capex direction. 

Increase in corporate tax rate.  

Catalyst

Generate cash and pay a dividend.