Exxon Mobil’s Q1 Earnings: A Promising Start To The Year

Summary:

• Exxon Mobil’s Q1 earnings reveal a strong performance driven by investments in advantaged assets, cost discipline, and an evolving business model.
• The company’s M&A strategy focuses on value creation through divestments, acquisitions, and leveraging technological advancements.
• Exxon Mobil’s potential acquisition of Pioneer could solidify its dominance in the Permian Basin but also expose the company to long-term risks associated with a heavy reliance on fossil fuels.

Exxon Mobil’s (NYSE:XOM) robust Q1 earnings report demonstrates the company’s resilience and adaptability in the face of moderating energy prices and refining margins. In this investment analysis, we’ll explore Exxon Mobil’s strategic priorities, asset investments, and ongoing business model evolution, which have contributed to its strong financial performance. We will also assess the company’s M&A strategy, potential risks and opportunities in a Pioneer acquisition, and valuation in light of recent geopolitical and industry developments.

Record Q1 Starts The Year In Strong Position

Exxon Mobil’s Q1 earnings report showcases the company’s impressive performance despite challenges from moderating energy prices and refining margins. We are particularly impressed with Exxon Mobil’s strategic priorities, investments in advantaged assets, mix improvements, and cost and operating discipline, which have proven to be effective in driving this exceptional performance. The company’s commitment to expanding energy supplies to meet the world’s ever-growing demand, as demonstrated by the remarkable increase in production, is a positive sign for its future growth prospects.

One of the most striking takeaways from the Q1 earnings is Exxon Mobil’s increase in production, which added 300,000 oil-equivalent barrels per day to the global supply. The growth was driven primarily by the 40% production increase from Guyana and the Permian Basin. Exxon Mobil’s diverse portfolio and commitment to investing in low-cost and advantaged assets have contributed to this growth, which is a positive sign for the company’s future. Additionally, the Low Carbon Solutions business is gaining momentum, with the long-term agreement with Linde and the world’s largest low carbon hydrogen facility in Baytown as significant milestones that showcase Exxon Mobil’s dedication to addressing climate change.

Exxon Mobil’s ongoing evolution of its business model is another positive sign for the company’s future. The establishment of Global Business Solutions, Exxon Mobil Supply Chain, and the launch of the Global Trading organization are strategic moves that we anticipate will drive further efficiencies, improve operating and financial results, and ultimately enhance shareholder value. These initiatives are a testament to the company’s ability to adapt to market conditions while addressing society’s evolving needs, including emissions reduction.

In terms of production and margins, Exxon Mobil achieved around 615 kboepd in Permian production in 1Q23, meaning 10% Permian growth for FY23 has already been achieved (550 kboepd in FY22). Although we are modeling flat Permian production from here, comments on operational efficiency suggest further growth potential. Furthermore, Payara in Guyana could be at full production, with Liza-2 bottlenecked, for all of FY24, delivering cost-recovery barrels and NOPAT margins significantly higher than the current portfolio.

Despite challenges from moderating energy prices and refining margins, Exxon Mobil’s underlying performance is robust, reflected in its record earnings and cash flow from operations. The company’s cash balance expanded to over $32 billion, the high end of the range, despite returning $8 billion to shareholders. At our $80 Brent forecast, we see over $8 billion in surplus cash generation in FY23, after over $30 billion in return of capital. Exxon Mobil has already delivered $7 billion of the $9 billion in structural cost savings and has started the Beaumont refinery expansion, bringing takeaway and basis surety to Permian crude while backing out imported VGO.

In terms of refining margin trends, while predicting refining margins can be challenging, we believe that refining margins are likely to improve in the short term due to seasonal factors and increased demand. Historically, refining margins tend to be lower at the beginning of the year, coinciding with the seasonally low demand period. As we head into the second and third quarters, with the driving season approaching, we typically see supply and demand tighten up, resulting in improved margins. In the longer term, China’s role in demand and exports, as well as the impact of European gas and carbon prices on the marginal tier of production, will be crucial factors to monitor.

In our opinion, Exxon Mobil’s Q1 earnings report is a positive sign for the company’s future growth prospects. The company’s diverse portfolio, operational efficiency, and focus on cost savings, combined with the strength of its balance sheet, make it a company that is well-positioned.

M&A Strategy

Our analysis of Exxon’s M&A strategy highlights the company’s commitment to high-grading its portfolio through a disciplined and value-focused approach. This approach has been successful since its implementation in 2018, with the company expecting to hit its divestment objectives sometime this year. Exxon’s strategy revolves around optimizing and maximizing the value of its assets, ensuring that divestments only occur when valuable opportunities arise.

Exxon’s divestment process is built on a solid foundation, identifying assets that may not be considered strategic or that might yield higher value for potential buyers. This approach allows the company to consistently place assets on the market and realize their value. As Exxon continues to evaluate its portfolio, it maintains an inventory of assets for potential divestment, targeting deals with buyers who can extract greater value from these assets.

While divestments remain an important aspect of Exxon’s M&A strategy, the company is also constantly searching for value-accretive acquisitions. Exxon’s primary focus is not on increasing volume but on finding assets that create unique value for shareholders. Acquisitions are pursued only if Exxon’s involvement can enhance the combined value of the two companies.

Technology plays a significant role in Exxon’s strategy as well. The company is heavily invested in developing proprietary technology that can improve resource recovery or reduce development costs, thus creating more value. The success of such technology can open up new opportunities for acquisitions, particularly in areas like the Permian, where Exxon has a strong presence. The same principle applies to other parts of Exxon’s portfolio with substantial businesses and ongoing technology advancements.

We believe Exxon’s M&A strategy is centered on value creation through both divestments and acquisitions, with a strong emphasis on leveraging technology advancements. This disciplined and focused approach has proven to be effective, helping Exxon optimize its portfolio and deliver value to shareholders. As the company continues to refine its strategy, we can expect Exxon to remain a key player in the industry, driving value through its M&A activities.

Pioneer: Opportunity and Risks

Exxon Mobil is reportedly considering a potential megadeal with Pioneer, the largest oil producer in the Permian Basin, valued at around $49 billion. After posting record profits in 2022, Exxon is flush with cash and aims to utilize its windfall profits for a seismic deal that could reshape the US oil-and-gas industry while expanding its presence in West Texas shale. Such a deal, if it materializes, would likely be Exxon’s largest since its merger with Mobil Corp. in 1999, granting the company a dominant position in the oil-rich Permian Basin, an area integral to its growth plans.

In our opinion, Exxon Mobil’s potential acquisition of Pioneer reflects a bold and strategic move to solidify its dominance in the oil-rich Permian Basin, while also signaling the company’s unwavering commitment to fossil fuels in an era where many competitors are increasingly focusing on renewable energy. While the deal has its merits, we believe that Exxon’s long-term reliance on fossil fuels could prove to be a double-edged sword, especially as concerns about climate change and an eventual decline in oil demand continue to grow.

We find it noteworthy that despite the pressure to diversify its energy portfolio, Exxon appears to be doubling down on fossil fuels with this potential acquisition. The company’s decision to focus primarily on oil-and-gas assets, rather than exploring renewable energy alternatives, could be seen as a risky strategy in the long run. It is important for Exxon to carefully weigh the potential benefits of this acquisition against the growing global shift towards cleaner and more sustainable energy sources.

While the deal could provide immediate benefits to Exxon, such as access to Pioneer’s vast catalog of drilling locations and a dominant position in the Permian Basin, we cannot ignore the potential long-term implications of this decision. Exxon’s unwavering focus on fossil fuels may expose the company to increasing regulatory and investor pressures, which could ultimately impact its profitability and market reputation.

Although the acquisition of Pioneer may seem like an attractive opportunity for Exxon to expand its presence in the Permian Basin and leverage its windfall profits, we believe that the company should remain cautious and consider the broader implications of this move. As the global energy landscape continues to evolve, Exxon’s refusal to diversify its energy portfolio could put the company at a disadvantage when compared to its more forward-thinking competitors.

Valuation

Note: all data in this section are based on FactSet.

Exxon Mobil’s remarkable financial performance in recent times can be largely attributed to the surge in energy prices, fueled by inflationary pressures, the ongoing war in Ukraine, and improved spending discipline within the industry. In 2022, the company’s earnings per share skyrocketed by 161%, reaching an impressive $14.06. While it is true that weaker energy prices are expected to cause a 27.6% decline in earnings per share in 2023, the projected figure of $10.17 is still a substantial improvement from 2020’s earnings per share of $5.38, and could potentially be the second-highest year on record for Exxon.

In our view, Exxon Mobil’s relatively high forward 12-month price-to-earnings (P/E) ratio of 11.9 is justified, considering the significant strides the company has made in improving its balance sheet. Exxon is expected to achieve a net cash position of $1.7 billion by 2024, assuming no additional major acquisitions take place. This marks a noteworthy turnaround from the net debt of $63 billion reported in 2020.

We believe that investor confidence in Exxon Mobil is well-founded, given the increased capital discipline observed across the industry and the rising geopolitical uncertainties. The ongoing conflict between Ukraine and Russia, along with the escalating risks in the Middle East, contribute to this uncertainty and may potentially keep energy prices elevated in the near term.

Conclusion

Exxon Mobil’s impressive Q1 earnings and strategic moves underscore its commitment to growth and value creation. The company’s diverse portfolio, operational efficiency, and focus on cost savings have contributed to its strong financial performance. However, it is crucial for Exxon Mobil to carefully consider the long-term implications of its strategic decisions, particularly in the context of the global shift towards cleaner and more sustainable energy sources. As the energy landscape continues to evolve, Exxon Mobil must balance its pursuit of growth and dominance in the oil and gas sector with the need to adapt to changing market conditions and increasing pressure to embrace renewable energy alternatives. Given these considerations, we believe the stock is fairly valued.

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