Energy

The Exxon Mobil of 2020 to 2030 Will Be Quite a Different Company Than in Its Past

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It’s no secret that it has been hard for investors to make big profits in the oil and gas sector in recent years. Oil stocks haven’t exactly screamed higher when oil rises, but the shares seem to love selling off on any sort of news they can find. Exxon Mobil Corp. (NYSE: XOM) is the king of oil and gas in America, with close to a $300 billion market cap. The problem is that the stock is still down over 30% from its peak of 2014, and many investors refuse to touch fossil fuels, whether or not they are deep into the ESG (environmental, social, governance) theme.

If things do not change drastically, the Exxon of the next decade almost certainly will look and act like a very different company than its investors have previously thought of it.

Several changes and developments are starting to take shape that will be rather different for investors ahead. Major asset sales around the globe, a shift in production in North America, a focus of looking closer to home, some credit concerns, and dividends and buybacks are all up for discussion.

The first thing to note, with or without change, is the colossal failure that Exxon has been for investors in recent years. The good news for Exxon is that it has been gearing down its liabilities and long-term debt, and at least the oil and gas giant can claim that its losses were nowhere near as bad as the second-tier and third-tier players. That said, investors in this stock have still felt punished. Several developments are underway, and it’s up to investors to decide if this will work well or just lead to another decade of stagnation.

A Reuters report signals that Exxon will be selling off most of its upstream assets in Europe and will just keep a stake in the Netherlands operations. Other asset sales are said to be coming for Asia and Africa. All combined, the capital being brought back may amount to $25 billion. And prior communication from Exxon for longer-term divestitures or sales was up to $25 billion by 2025.

Now Moody’s finally has made a credit rating action on Exxon. The agency has changed its credit outlook to Negative from Stable. This matters because Exxon is currently one of the few remaining Aaa credit ratings in all U.S. corporations. The Moody’s report cited the company’s substantial negative free cash flow and expected reliance on debt to fund its large growth capital spending program, and it forecasts that the company’s debt will rise despite some potential mitigation from asset sales.

Moody’s sees Exxon’s credit metrics softening over the next few years. Negative free cash flow will be around $7 billion in 2019 and $9 billion in 2020, per the report, with a target of $60 per barrel of Brent crude. The report also went on to say that negative free cash flow is likely to continue in 2021, as its growth capital investments cannot be funded with operating cash flow and asset sales at projected levels based on Exxon’s substantial dividend payout at current commodity prices. Also cited in the report are environmental considerations, natural and manmade hazards, social risks, rising litigation risk around climate change, carbon taxes, future laws and regulations, corporate governance considerations and a shift in global demand toward other sources of energy and conservation. All in all, Moody’s opined that its expectation for weakening credit metrics could result in a credit rating downgrade in 2020.


Exxon still has substantial natural gas efforts underway. Almost a decade after its approximately $36 billion acquisition of XTO, Exxon remains the top dog in U.S. natural gas, and it has become more active in many of the shale plays around the United States since. The company wisely stayed out of the Occidental acquisition of Anadarko, which originally was to be a target of rival Chevron Corp. (NYSE: CVX).

An ongoing project in Guyana is soon to begin production, and the projections are calling for up to 750,000 barrels per day of production by 2025 from that project alone. This may be one of the reasons that Exxon is willing to part ways with many assets in Africa and Asia as it sees more certainty closer to home.

And in the oil patch, investors just seem to prefer Chevron over Exxon. Chevron’s market cap is still lower than Exxon at $227 billion, but that’s because Chevron shares were last seen up 9% year to date and up 2% from a year ago, compared with a mere 2% year-to-date gain and a 9.5% drop from a year ago for Exxon.

It’s hard to call either oil and gas giant a value stock, but analysts prefer Chevron’s cash flow expectations over Exxon’s. In dividend payouts, Exxon’s yield of 5% is still a full point higher than the 4% yield Chevron pays out. Chevron is valued at about 17 times expected 2020 earnings per share, versus a multiple of about 18 times for Exxon.

It’s also worth noting that Exxon and Chevron have lagged their European supermajor peers in investing serious cash in renewable energy. Both continue to seek ways to mitigate the effects of carbon emissions rather than making big cuts to emissions. If electric vehicles and renewable energy generation become as popular as some projections have indicated over the next decade, these two companies are currently making poor investment decisions. Both, for example, have invested in carbon capture technologies that have little or no value in reducing the effects of carbon emissions.

Lastly, the consensus analyst target prices from Refinitiv look more favorable for Chevron than Exxon. Chevron’s $119.40 current price and its consensus target price of $136.58 imply upside of almost 14.5%, before considering its dividend. Exxon’s share price of $69.65 and consensus target price of $79.02 imply upside of nearly 13.5%, before considering the dividend. Analysts on average are not even expecting Exxon to go back to its 52-week high of $83.49, while they expect Chevron to go above its 52-week high of $127.34.

It’s going to be a long road for Exxon in a period when fossil fuels have become less and less important to many investors and consumers alike. That said, oil and gas aren’t going to be dying any time soon. If you look around at home and work it’s going to be impossible to find products and fixtures that weren’t made with compounds from oil.

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