Large but still cyclical cash flow

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Exxon Mobil (XOM) is an integrated oil and gas company that explores, produces and refines oil and gas globally. In 2021, its daily production was 2.3 million barrels of liquids and 8.5 billion cubic feet of natural gas each day. As of December 31, 2021, reserves amounted to 18.5 billion barrels of oil equivalent, of which 66% liquids.

The company also has significant refining operations with a global refining capacity of 4.6 million barrels of oil per day and is one of the largest manufacturers of basic and specialty chemicals in the world.

ExxonMobil is the largest direct descendant of John D. Rockefeller’s Standard Oil, and the current entity was formed in 1999 by the merger of Exxon and Mobil. The official incorporation of the company dates back to 1882. Exxon Mobil has a market capitalization of $353 billion.

I am bearish on XOM in the medium term due to the inevitable cyclical nature of oil prices which are now near all-time highs. The company is also a key target in anti-fossil energy movements.

Recent financial results

2021 has been a year of solid growth for XOM due to rising energy prices around the world. Revenue rose 57% to $285.6 billion. Net income attributable to XOM was $23 billion, a significant improvement from a large net loss in 2020 (mostly due to impairment charges).

Cash flow from operations more than tripled to $48.1 billion, and capital expenditures were slightly lower at $12.1 billion. With $36 billion in free cash flow to allocate, the company paid $14.9 billion in dividends, reduced debt by $32.4 billion and repurchased $155 million in stock.

Share buybacks were lower than normal; however, the company has a $10 billion share buyback authorization that it expects to execute over the next 12-24 months. Still, buying back so many shares when the stock was nearing all-time highs versus buying back when the shares were at two-year lows doesn’t seem like a prudent allocation of capital.

The company enjoys a strong investment grade credit rating, particularly in light of recent debt reduction and strong free cash flow results.

XOM Investor Day

At its annual Investor Day, Exxon announced plans to double earnings and cash flow by 2027 from 2019 levels. dollars on an annual basis.

The company expects its return on capital employed to improve to 14% in 2025 and 17% in 2027. These forecasts assume $60 oil and historical average margins. The expected growth is the result of structural cost reductions of $5 billion achieved through 2021, and an additional $4 billion expected by 2023. Volume growth, primarily in the Permian Basin and French Guiana, also contributes to improving the margins of new technologies upstream and downstream. /chemical projects.

Evaluation

Based on analyst advice provided by the company, they could have the ability to return around $100 billion to shareholders over the projected five-year period to 2027.

Earnings are expected to rise significantly in 2021 to $8.13 per share, largely due to higher oil prices resulting from the Russian-Ukrainian conflict. As oil prices normalize in 2023, EPS estimates have come down to around $7.06.

As noted, XOM is currently generating significant free cash flow, much of which has been allocated to dividend payments. The current annual dividend is $3.52, which equates to a dividend yield of 4.2%.

The Taking of Wall Street

As far as Wall Street is concerned, XOM has a moderate buy consensus rating based on 10 buy ratings, 13 hold ratings and no sell ratings assigned over the past three months. At $87.28, Exxon Mobil’s average price target implies 4.5% upside potential.

Conclusion

While the company’s incredible operating cash flow projections assume an average oil price of $60 over the period, that doesn’t necessarily mean XOM’s stock price will hold steady if oil goes from more than $100 to $60.

The trade correlation between oil and gas companies and the absolute price of oil is reasonably close. In other words, if Oil pulls back to $60, which it could do at some point, XOM stock should also decline.

Investors should also not ignore the political scrutiny placed on fossil fuel companies today. These include banning exports, stopping drilling permits, divesting institutional investors, criminal investigations, boycotts and other legal actions.

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