Exxon Mobil: As Dear As Salt
Contributor since 2013 / 3122 Followers
Summary:
- Demand and supply dynamics appear favorable for oil and gas companies.
- By 2030, 60% of U.S. power demand is expected to be dependent on fossil fuels.
- Exxon Mobil Corporation is heavily invested in LNG, which is experiencing a significant expansion in demand.
- We are reiterating our $150/share Price Target and Buy Rating on XOM’s shares.
Lanier
Investment Conclusion
In January, we initiated on Exxon Mobil Corporation (NYSE:XOM), with a $150/share Price Target and a Buy Rating. The company’s shares have appreciated by 18% since January. In that article, we had highlighted key factors signifying long-term prosperity for major fossil fuels companies, specifically XOM. We remain confident in our elongated time horizon thesis on XOM. However, considering developments following our article, it appears that the ever fluid oil and gas (O&G) industry environment is positioning in a manner that could benefit XOM’s shares over the near term.
In regard to demand dynamics, there is the expansion of right-wing influence in Europe that is leading to a pushback in spending on sustainable power projects. The U.S. Presidential Elections are likely to be followed by a more positive Liquefied Natural Gas (LNG) export policy. Global O&G inventory levels are at their lowest since 2017, and global power consumption is projected to expand by double digits by 2030. The Middle East political situation is far from resolved, are elements that could potentially increase the clamor for O&G.
On the supply side, with major production of fossil fuels shifting to non-OCED countries, with erratic production dynamics, and the declining growth in U.S. oil production, OPEC appears likely to dictate oil prices by controlling oil supply to global markets. In addition, European sustainable energy supply estimates are unlikely to be achieved, considering expected pullbacks in funding of additional projects. Further, escalation in the Gaza War continues to be an overhang on O&G supply dynamics. These factors could potentially reduce the supply of O&G.
Given these dynamics, fossil fuels prices appear positioned to rally, over upcoming months, in our opinion. As energy prices are a predominant driver of the market value of O&G company shares, XOM’s stock appears positioned to rally over the short term. We are reiterating our $150/share Price Target and Buy Rating for XOM. Our valuation is based on a 10-year Discounted Cash Flow model that incorporates normalized 10-year: revenues growth of 5%/year, operating cash flows as 13% of revenues/year, capital expenditures as 8% of revenues/year, a perpetual growth rate of 3%, and weighted average cost of capital of 7%.
Demand Side Dynamics
The LNG Factor
LNG appears prominent as a key long-term growth driver for major O&G companies. Early in 2024, the U.S. government imposed a pause in issuing new export decisions on LNG. The measure reflected in export controls on the supply of LNG to international markets, particularly European nations. Considering that the import of Russian LNG as a fraction of total fossil fuels imported fell from 45% to 15%, following the Ukraine War, Europe represented a ready market for additional American LNG. However, with both U.S. Presidential Candidates indicating that they are likely to lift the pause on new LNG export decisions, American LNG trade with Europe is poised to expand substantially over the next year and beyond.
In addition, LNG demand is likely to further escalate in the continent due to lower than projected solar and wind energy output driven by a pushback against the funding of new sustainable energy projects. Overall, Europe is going through a Green Deal fatigue, given the unfavorable impact the policy is having on economic growth, inflation, energy prices, and the cost of living. With increasing focus on economic recovery, Europe’s penchant for solar and wind power appears positioned to take a back seat. For the continent, the energy focus has shifted to LNG, supply of which is expected to double over the back half of the decade, providing abundant power. The U.S. and Qatar are projected as the primary providers of the potential LNG over supply.
In addition, China, the largest importer of crude oil in the world, is increasing its uptake of LNG, shifting the use of diesel for commercial purposes to LNG. Cumulatively, industry thought leaders consider LNG as a transition fuel, one which will support the objective of reducing reliance on crude oil, as sustainable energy eventually becomes more abundant.
In that regard, it is notable that XOM along with QatarEnergy, has embarked on a project called “Golden Pass Energy Terminal”, which will produce large quantities of LNG. QatarEnergy will be responsible for marketing 70% of the LNG output, with XOM assigned the remaining 30% or roughly 5 million mt/year. First exports from Train one are expected in December 2025, Train two in June 2026, and Train three in December 2026. Further, considering the strong global demand for LNG, XOM has additional LNG projects under development in Papua New Guinea, Mozambique, and Qatar. Moreover, based on management commentary, it appears that the firm’s objective is to have 80% of its LNG output committed to purchasers, ahead of production.
The Hunger For Power
As per Goldman Sachs, compared to the 0.5% growth in power demand between 2000 and 2022, U.S. energy demand will expand by 2.4% between 2024 and 2030. The excess need for electricity will be driven by AI, electrification, and economic activity.
Data centers will represent 1/3rd of the growth in energy needs, deploying 8% of U.S. power in 2030, relative to 3% in 2023. In alternate terms, AI data centers’ power utilization will increase by 177 TWh from 2023 to 2030, reaching 307 TWh. Additionally, the U.S. is expected to add 2,000 AI data centers, by 2030. In that regard, it is notable that a ChatGPT query consumes 10x more power than a Google Search query.
Electric Vehicles (EVs) will represent the second major catalyst for American power demand growth. Electricity consumption associated with the segment is anticipated to advance to 131 TWh in 2030, from the current 18.3 TWh. Further, driven in part by the reshoring of businesses, energy demand across the commercial and industrial sectors will expand by 175 TWh, between 2023 and 2030, reaching 4,500 TWh. U.S. power generation capacity will need to advance by 47 GW, to meet demand in 2030. Analysts predict that 40% of the additional electricity demand will be fulfilled by green energy, and the balance by fossil fuels.
Regarding China, which consumes roughly 34% of the global energy supply (versus 16% by the U.S.), the nation’s EV revolution is well on the way. During 2024, 40% of new cars sold in China were EVs. In addition, the sale of EVs continues to expand by over 2 million every year. Net-net, with the U.S. and China, (which consume more than half of the world’s energy), projected to increase their uptake for power by 2030, the demand for electricity is anticipated to expand significantly over the upcoming years. As 60% of all energy demand is projected to be satisfied by fossil fuels, O&G companies are poised to benefit from the situation.
The Threat Never Goes Away
The Gaza War which began in October 2023 is just another instance of aggression against Israel by neighboring countries. The conflict is age-old, and began soon after Israel was recognized in 1948. Following that development, the Middle East has been a powder keg, with expectations of war ever present. In the context of the current scenario, the likelihood of the Gaza War escalating cannot be overlooked. If the situation unfolds, there is likely to be a scurry to stockpile O&G inventories, driving the prices of the commodities higher, at least over the short term. In that respect, it is important to note that Citi predicts that the price of oil could reach $120/barrel if supplies are disrupted. This morning, WTI Crude Oil (CL1:COM) was trading at $67.50/barrel and Brent Crude Oil (CO1:COM) was trading at $71.40/barrel.
Supply Dynamics
OPEC Is In Charge
Although the International Energy Association (IEA) appears bearish on oil prices, based on non-OPEC supplies coming online, the story is not straightforward. U.S. oil production growth has declined in 2024 compared to 2023. Currently, there are 485 rigs drilling for oil in America, which is 20 fewer than the previous year. Although, analysts project that U.S. oil production will expand 2.2% in 2025 to 13.5 million barrels/day, we are far from convinced that the scenario will unfold as oil production growth has been flattish over 2024.
In addition, supply from Brazil has been erratic rather than a steady upward climb. Further, although Guyana is an oil stronghold, with output increasing significantly year-over-year, it is noteworthy that U.S. drillers are limiting oil output in response to depressed energy prices. Regarding Canadian oil, although output has increased over the previous year, oil production is constantly under threat from an administration that favors green energy and emissions control over global energy security.
The factors described above indicate that OPEC remains in charge of the global oil markets. If oil prices fall below $70/barrel, OPEC will cut oil supply to world markets to maintain the $70/barrel red line, the group associates with its liquid gold.
The Gaza War Once Again
Any escalation in the ongoing conflict in the Middle East, particularly if oil production facilities are targeted, could reflect in supply disruptions, reducing daily oil production. Considering that oil prices typically rally in response to supply disruptions, the Gaza War represents an ever present scenario for higher oil prices, over the near term.
Overall, given current and evolving O&G demand and supply dynamics, we are bullish on oil prices over the upcoming six to eight months. Therefore, we expect a strong rally in XOM’s shares to unfold accordingly.
Bottom Line
It is the IEA versus OPEC and Exxon Mobil. IEA has been projecting peak oil for years, while OPEC believes peak oil is hogwash. XOM, on the other hand takes a more balanced approach, that sustainable energy will expand, but fossil fuels will continue to rule the roost, over the foreseeable future. We are in Exxon’s camp.
Global energy security is paramount. Governments over the world are unlikely to toe the sustainable energy line without alternatives provided to fossil fuels that are cheap, versatile, and always available. Recall that the German bastion of windmills and solar panels folded in favor of coal when push came to shove. Oil and gas are far from their heydays. With widespread electrification, AI, and economic expansion on the horizon, the hunger for fossil fuels is unlikely to abate, in our judgment.
We suggest investors consider XOM to generate steady returns on investment, as the story unfolds day-by-day.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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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