Exxon Mobil: Positioned For Strong Growth And Current Buying Opportunity (NYSE:XOM)

On Friday, April 26, 2024, oil and gas supermajor Exxon Mobil Corporation (NYSE:XOM) announced its first quarter 2024 earnings results. At first glance, these results were somewhat mixed. The company did manage to beat the expectations of its analysts in terms of revenue, but unfortunately, it missed their earnings expectations. For its part, the market was not impressed with these results at all, as it sent the stock tumbling in the pre-market trading session that followed the release of these results:

The stock closed down 2.78% on the day, which is a very disappointing result for any investment, and it is certainly not something that will give investors much confidence about a company going forward.

However, in this case, it appears that the market’s reaction was unwarranted, as there was actually a lot to like in these results. In particular, the results from the massive Payara project in Guyana were very good, as was the significant quarter-over-quarter increase in operating cash flow. The company’s potential for forward growth also remains quite strong, and that is also illustrated in this report. In short, it appears that the market is focused too much on the non-cash one-time earnings charges as opposed to the company’s cash generation and future potential. The market sell-off yesterday could therefore represent a decent opportunity for investors to get into one of the few companies in the American market that is currently trading at a reasonable valuation and earn an attractive return over the next few years.

Earnings Results Analysis

As long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company’s earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article, as well as serve as a framework for the resultant analysis. Therefore, here are the highlights from Exxon Mobil’s first quarter 2024 earnings report:

• Exxon Mobil brought in total revenue of $83.083 billion in the first quarter of 2024. This represents a 4.02% decline over the $86.564 billion that the company brought in during the prior year quarter.
• The company reported an operating income of $10.748 billion for the reporting period. This represents a massive 43.97% decline over the $19.181 million that the company reported in the year-ago quarter.
• Exxon Mobil produced an average of 3.784 million barrels of oil equivalent per day in the current quarter. This represents a 1.23% decline over the 3.831 million barrels of oil equivalent per day that the company produced on average in the corresponding quarter of last year.
• The company reported an operating cash flow of $14.667 billion in the most recent quarter. This represents a slight 10.24% decline over the $16.341 billion that the company reported in the first quarter of last year.
• Exxon Mobil reported a net income of $8.220 billion in the first quarter of 2024. This represents a 28.08% decline over the $11.430 billion that the company reported for the first quarter of 2023.

At first glance, these results appear to be very disappointing. After all, Exxon Mobil saw every significant measure of operating performance decline compared to the prior year quarter. One of the biggest reasons for this was that crude oil and natural gas prices were lower in the first quarter of 2024 than they were in the first quarter of 2023. This may seem surprising considering that rising gasoline prices have been in the headlines quite a bit lately. However, this chart shows the spot price of Brent crude oil from January 1, 2023 through March 31, 2024:

While it is true that Brent crude oil prices rose 5.97% over the period, we can see that much of that rise came in late March 2024. During the months of January and February (and the first half of March) 2024, Brent crude oil prices were lower than in the first quarter of 2023. However, due to timing, hedging, and other factors, this did not hurt Exxon Mobil much in the quarter. In fact, the company reported that its upstream realizations were up 4% relative to the prior-year quarter. Thus, despite the fact that Brent crude oil prices were actually lower during most of the first quarter of 2024 than in the corresponding quarter of last year, Exxon Mobil was not impacted too much by this.

It is a different story with natural gas, however. In the winter of 2023, unusually warm weather throughout most of the Northern Hemisphere caused natural gas consumption to be lower than normal. In addition, the Freeport LNG outage temporarily removed 2 billion cubic feet per day of natural gas demand from the market. This naturally caused the domestic natural gas market to become oversupplied and, despite Freeport LNG resuming normal operations, that is still the case. This caused the spot price of natural gas at Henry Hub to decline 55.87% from January 2023 until March 2024:

Natural gas prices in Europe are also down, with Dutch TTF Gas falling a whopping 63.75% over the same period:

For the first quarter of 2024, Exxon Mobil Corporation’s upstream production volumes consisted of 67.6% crude oil and 32.3% natural gas when measured on a barrel of oil equivalent basis. Therefore, we can very quickly see why the steep declines in natural gas prices experienced in both the United States and Europe would have a negative impact on the company’s financial performance. Exxon Mobil pointed this out in its earnings report, stating:

Upstream first quarter earnings were $5.7 billion, a decrease of $797 million compared to the same quarter last year. The prior-year period was negatively impacted by tax-related identified items. Excluding identified items, earnings decreased $955 million driven by a 32% decrease in natural gas realizations and other primarily non-cash impacts from tax and inventory adjustments as well as divestments. These factors were partially offset by a 4% increase in liquids realizations and less favorable timing effects mainly from derivatives mark-to-market impacts.

Admittedly, Exxon Mobil is not solely an upstream production company, as it has refining and chemical divisions. However, the upstream unit is by far the largest contributor to the company’s financial performance, so we can very clearly see how any weakness here would translate to weakened financial performance across the entire company. That is exactly what occurred in the most recent quarter, and the major cause of it was lower natural gas prices in much of the world.

Upstream Growth Prospects

Fortunately, at least some of the upstream weaknesses that we saw in the latest quarter appear likely to improve in the future. First, as most readers likely know, oil prices have been increasing over the past few weeks. The spot price of Brent crude oil is up 7.03% over the past three months:

This is unlikely to be a short-term trend for a few reasons.

Rising tensions in the Middle East, particularly with respect to Israel and Iran

Iran controls the Strait of Hormuz, through which 21 million barrels of oil moves every day. That represents about 21% of total petroleum liquid consumption worldwide. It would be very easy and cheap for Iran to close off this Strait, for example, by sinking a few tankers at its narrowest point. That would obviously greatly impact the global supply of oil in a negative way. As of right now, it is uncertain what the risks of this actually happening are, but it is certainly going to be a factor that oil traders will consider as tensions rise between Iran and Israel, since reducing the flow of oil to Israel’s Western allies would be an obvious strategic move in any war. After all, the steep rise in oil prices that would result from such a move would have a negative impact on the economies of the United States and the European Union.

Warfare Between Russia and Ukraine

Recently, Ukraine has been conducting offensive strikes against Russian refineries using suicide drones. As Zero Hedge stated this morning:

Ukrainian military planners have been ramping up Kamikaze drone strikes against the Russian energy industrial complex this week, including an overnight attack damaging an oil refinery as Western sanctions fail to crush Putin’s oil-rich economy that funds the “special military operation” in Ukraine. This comes despite the US publicly telling the Ukrainians to stop attacking Russian refineries for fear Brent crude prices could spike and worsen the inflation storm in the US ahead of the presidential elections in the fall.

As of right now, these drone strikes have taken about 10% of Russia’s refining capacity offline. It has long been something of an open secret that the Western sanctions on Russia have had limited effect due to nations such as China, India, and a few other BRICs nations actively ignoring them and providing a market for Russia to sell refined products. However, if Russia’s refineries are taken offline through these drone strikes, then obviously it will not be able to supply refined products to its trading partners. These trading partners will then turn to refined products produced in other nations. That will obviously increase the demand for the remaining supply of these products and push prices up.

Declining Value of the US Dollar

In a few recent articles, I pointed out that various central banks around the world have been selling off U.S. Treasuries in favor of gold. For example, China’s holdings of U.S. Treasury securities have fallen in 24 of the past 28 months and are now at levels that have not been seen since June 2009:

The Federal Reserve’s custody data reports that there has been virtually no change in global Treasury holdings since 2013:

The fact that gold reserves have been increasing while US Treasury reserves remain flat suggests that nations around the world are beginning to lose faith in the U.S. dollar and the U.S. government’s ability to service its debt. The disappointing performance of a few recent U.S. Treasury bond auctions reinforces this conclusion.

As I have pointed out in various past articles, one of the reasons for the strength and stability of the U.S. dollar as well as the U.S. government’s ability to finance its deficits ever since the Nixon shock has been its use in the oil trade. In short, oil-importing nations have needed to hold U.S. dollars to pay for oil imports from oil-exporting nations. Those oil-exporting nations then used the dollars that they received via the oil trade to purchase U.S. Treasuries. If this is truly beginning to break down due to a reduction in global confidence in the U.S. dollar, as appears to be the case, then that will almost certainly serve as a tailwind for oil prices. After all, such a situation will mean that the oil-exporting nations will be less inclined to accept U.S. dollars in exchange for oil, which will reduce the demand for U.S. dollars globally and send the price of oil when measured in U.S. dollars up. This is, admittedly, a very long-term thesis though as there is currently no viable alternative for U.S. dollars as other countries with sufficiently large economies to have sufficient supply of currency to facilitate international trade (such as the European Union) have problems of their own.

Exxon Mobil Poised To Grow Production

A long-term rise in oil prices, as seems probable, will only be one driver of growth for the company. Exxon Mobil is also positioned to grow its production going forward. This will allow it to grow its revenue even without any increase in energy prices. After all, an increase in production results in the company having more products to convert into revenue, so all else being equal, it will result in revenue growth.

In its earnings report, the company specifically described one of its new investments in forward production growth:

The company announced a final investment decision for the Whiptail development in Guyana. This is the sixth offshore project and is expected to add approximately 250,000 oil-equivalent barrels per day of gross capacity with start-up targeted by year-end 2027. Construction is underway on the Floating Production Storage and Offloading vessels for the Yellowtail and Uaru projects, with Yellowtail anticipated to start production in 2025 and Uaru targeted for 2026. In addition, one new exploration discovery was made this year in the Stabroek block.

The company makes mention of the final investment decision for the Whiptail development in Guyana. The fact that this is a final investment decision means that Exxon Mobil will be proceeding with this development, and it can be expected to add about 250,000 barrels of oil equivalent per day to the company’s upstream volume when it is completed in late 2027. The science and techniques that are used to construct production estimates like this have been refined for decades, so we can assume that this is a reasonable estimate. As the company’s production in the first quarter was approximately 3.784 million barrels of oil equivalent per day, we can see that this new project alone should provide an incremental production boost of 6.61% over its first-quarter 2024 levels.

Exxon Mobil also made mention of the Yellowtail and Uaru projects in the statement above, which are also part of the mega-project that is under development in Guyana. These two phases of the project are expected to come online over the next two years, providing a further production boost.

Finally, Exxon Mobil also has projects in the Permian Basin in Texas, Brazil, and a few other locations around the world that are still under development. Several of these projects are expected to come online between now and the end of 2027. The output of these projects will be added to the company’s total and thus boost its revenue due to the new supply.

The projects that are mentioned above should allow Exxon Mobil to grow its upstream production to approximately 4.2 million barrels of oil equivalent by 2027:

If we assume that Brent crude oil will trade at $60 per barrel in 2027, this additional production should allow Exxon Mobil’s upstream profit to be double its current level at that time. As the upstream operation is the largest profit center for Exxon Mobil, we can see how this should be able to drive the company’s growth over the next few years. This is perhaps especially true since it is very difficult to make a case for Brent crude trading at $60 per barrel in 2027. It will, most likely, be significantly higher if for no other reason than the tailwinds from a declining dollar as well as a likelihood of a global supply shortage of crude oil, as we have discussed in various previous articles. Thus, the company seems to have a reasonably strong pipeline for growth over the next few years.

Financial Considerations

As I have pointed out in various past articles:

It is always important to analyze the way that a company finances its operations. This is because debt is a riskier way to finance a company than equity because debt must be repaid at maturity. That is typically accomplished by issuing new debt and using the proceeds to repay the existing debt. After all, very few companies have sufficient cash on hand to completely repay their debt as it matures. This process can cause a company’s interest expenses to increase following the rollover in certain market conditions.

For many years now, Exxon Mobil has been fairly popular among some investors because of its incredibly low debt load. We can see this by looking at the company’s net debt-to-equity ratio, which tells us the degree to which a company is financing its operations with debt as opposed to wholly-owned funds.

As of March 31, 2024, Exxon Mobil has a net debt of $7.120 billion compared to shareholders’ equity of $213.0520 billion. This gives the company a net debt-to-equity ratio of 0.03 today. This is obviously an incredibly low ratio for any American company, but here is how it compares to some of the company’s peers:

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(all figures are calculated from the most recent balance sheet available for those companies that have not yet reported Q1 2024 results)

As we can clearly see, Exxon Mobil has by far the least leveraged balance sheet of any of its supermajor peers. Admittedly, none of these companies have particularly outsized levels of leverage, but Exxon Mobil’s low leverage relative to them is still a very good sign that the company is not overly reliant on debt to fund its operations. This is something that is generally nice to see right now, considering that interest rates are at much higher levels today than they have been over most of the 21st century.

As might be expected, given the company’s very low current leverage, Exxon Mobil has not been impacted much by the rising interest rates that have been weighing on other companies in other industries. As we can see here, the company’s net interest expenses have been relatively stable since the middle of 2021:

There have, naturally, been a few fluctuations, but nothing too drastic here. Overall, it does not really appear that Exxon Mobil has much exposure to interest rates. Thus, we should not have to care about the fact that it is becoming increasingly unlikely that the Federal Reserve will cut rates drastically in the near future.

In short, Exxon Mobil continues to sport a rock-solid balance sheet that nobody who is invested in the company needs to lose sleep over holding in their portfolios.

Valuation

According to Zacks Investment Research, Exxon Mobil has a forward price-to-earnings ratio of 12.16 at the current stock price. This is substantially less than the 22.60 forward price-to-earnings ratio of the S&P 500 Index (SP500). It is also quite a bit less than the forward price-to-earnings ratios of the other major American equity indices:

The Dow Jones Industrial Average (DJI) has a forward price-to-earnings ratio of 25.89 right now, so even American blue chips are substantially more expensive than Exxon Mobil today.

As I have pointed out a few times in the past, though, the entire traditional energy industry has traded at remarkably cheap valuations for quite some time. Therefore, it might be a good idea to compare Exxon Mobil’s current valuation to that of some of its peers in order to determine which peer company currently looks the most attractive in terms of valuation. This is summarized in this table:

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(all figures from Zacks Investment Research)

Admittedly, we can see that Exxon Mobil does not appear to be especially cheap when compared to its peers. This is particularly true when compared to the European energy majors. However, the stock is still very cheap when compared to the broader market. When we consider that the company is very well-positioned to deliver solid growth over the next few years, it appears that we have been handed a buying opportunity.

Conclusion

In conclusion, Exxon Mobil’s most recent earnings were nowhere near as bad as the market sell-off on Friday would suggest. In fact, there is a lot to like here, including the company’s continued success in Guyana and the positioning for forward growth. Exxon Mobil also appears to be trading at a reasonable valuation considering that oil prices are on an upswing. Overall, this company appears to be a buy right now.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.