Exxon Mobil (NYSE:XOM) is set to improve its earnings power through targeted investments in high-potential production areas such as Guyana and Permian, while at the same time the extension of OPEC+ supply curbs could also have a positive effect on petroleum prices. Exxon Mobil provides deep free cash flow value for investors, and the company has said that it is looking to push high-growth upstream assets in a bid to boost the importance of the production segment. With petroleum prices possibly benefiting from long-term supply curbs, I believe Exxon Mobil is set for a period of strong earnings growth. With shares also dipping lately and approaching oversold territory (RSI of 33.0), I believe Exxon Mobil makes a superior value proposition for long-term investors!
Previous rating
I rated shares of Exxon Mobil a buy after the energy company announced the acquisition of Pioneer Resources which was setting Exxon Mobil up to double its production in the important Permian basin. The Permian has been a growth driver for Exxon Mobil, and it will continue to play an important role in fueling segment-specific earnings growth. I believe shares of Exxon Mobil's recent dip is undeserved, and investors have a unique opportunity here to double down on the energy company's shares after OPEC+ announced output curbs until FY 2025 earlier this month.
Exxon Mobil focuses on high-potential Permian and other upstream assets, OPEC+ provides price tailwinds
A major shift is happening in Exxon Mobil’s portfolio, and it could have consequences for the energy firm and its shareholders for many years to come. The change I am talking about is that Exxon Mobil is making a bet on durable growth in upstream earnings, driven by projects in Guyana and Brazil, but especially in the Permian... which has been already a key driver of the company's production growth and which is what the Pioneer Resource acquisition was all about: Why The Pioneer Deal Is A Game-Changer. These high-potential areas contributed 43% of the company's upstream production in FY 2023 and Exxon Mobil is planning on growing this percentage to more than 50% in the next four years.
What could make this strategy especially lucrative for Exxon Mobil is that OPEC+ recently made a far-reaching output decision that will make lower petroleum supplies a reality until at least the end of FY 2025.
According to an OPEC+ alliance announcement from the beginning of June, the organization seeks to cut 3.7 million barrels per day from supplies until the end of next year. These production curbs were originally scheduled to expire by the end of this year, and the extension of supply cuts could actually accelerate Exxon Mobil’s upstream growth strategy as it supports petroleum prices. Prices have so far reacted positively to the OPEC+ output guidance and I believe that Exxon Mobil, as one of the largest domestic energy producers in the U.S., will benefit from higher average petroleum prices in Q2'24. Petroleum price (WTI) are currently trading about 26% above the 10-year average price.
Exxon Mobil generated $5.7B in upstream earnings, on an adjusted basis, in the first fiscal quarter which showed a quarter-over-quarter decrease of approximately 10%. This decline in earnings happened due to falling average petroleum as well as natural gas prices. Exxon Mobil’s average petroleum price (in the U.S.) fell 2% quarter over quarter to $74.96 per barrel while the natural gas price dropped 13% Q/Q to $2.22 per kcf.
Exxon Mobil also continues to generate a ton of free cash flow... which is the ultimate value supporting an investment in XOM. In the first fiscal quarter, despite lower average prices for petroleum and natural gas, the energy firm generated $10.1B in free cash flow, which was $2.1B more than in the previous quarter.
-11.0%
ExxonMobil FY 2024 FY 2023 $B Quarter 1 Quarter 4 Quarter 3 Quarter 2 Quarter 1 Y/Y Growth Cash Flow from Operating Activities $14.7 $13.7 $16.0 $9.4 $16.3 -9.8% Proceeds from Asset Sales $0.7 $1.0 $0.9 $1.3 $0.9 -17.6% Cash Flow from Operations and Asset Sales $15.4 $14.7 $16.9 $10.7 $17.2 -10.2% PP&E Adds / Investments & Advances ($5.3) ($6.7) ($5.2) ($5.7) ($5.8) -8.6% Free Cash Flow $10.1 $8.0 $11.7 $5.0 $11.4
(Source: Author)
Exxon Mobil's shares are now trading at less than 12X FY 2025 earnings
Exxon Mobil is profitable on both an earnings and free cash flow basis. Currently, shares of Exxon Mobil have a price-to-earnings ratio of 11.1X which is only slightly above the longer term (3-year) average P/E ratio of 9.0X. Exxon Mobil recently has seen some undeserved selling pressure and a down-side revaluation that, in my opinion, could be corrected as WTI prices have seen some upside momentum following OPEC+'s decision and because investors may see EPS upside revisions for ExxonMobil.
In my opinion, Exxon Mobil could trade at 13-14X FY 2025 earnings in a rising-price world for petroleum products as the supply outlook is favorable to large energy producers. This fair value P/E ratio applied to a consensus EPS forecast of $9.84 per-share for FY 2025 calculates to a fair value share price range of $128-138. OPEC+ production curbs and the positive price trend for petroleum since the announcement are the main reasons for my rating upgrade here.
Risks with Exxon Mobil
The biggest risk with Exxon Mobil, as I see it, is a potential slowdown in earnings growth in the production segment, as this is clearly the company’s strategic priority. If Exxon Mobil failed to execute well on its upstream strategy -- growing the earnings share of its high-potential production plays in Guyana, Permian and Brazil to more than 50% of total segment earnings by FY 2027 -- then I believe investors could lose trust in the company’s capital return potential and shares may trade at a lower valuation factor.
Final thoughts
Exxon Mobil is strategically focusing on growing its upstream earnings, led by Permian. OPEC+’s recent decision to extend production cuts to the end of FY 2025 strongly supports this strategic decision as it significantly increases the earnings potential of Exxon Mobil's high-growth production assets. With petroleum prices converging on the $80 per barrel price point, Exxon Mobil could also benefit from a new round of EPS upside revisions. The biggest selling point for Exxon Mobil is the valuation, in my opinion, which continues to skew the risk profile to the upside. With considerable free cash flow and segment-specific earnings upside, I believe paying 11X P/E for the largest U.S. energy company and its 3.5% yield is a bargain!
The Asian Investor
I look for high-risk, high-reward situations. Five largest portfolio holdings: Bitcoin, SoFi, Alibaba, PayPal, Western Alliance. Early buyer of cryptocurrencies. I live in Thailand :)
Analyst’s Disclosure: I/we have a beneficial long position in the shares of XOM, CVX, COP either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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