The Remaking Of Exxon Mobil

The Remaking Of Exxon Mobil


It is now obvious that the dividend is in no danger.

Dividend growth, if any, is likely to remain slow for the time being.

Several large projects promise enhanced profitability in the future.

The Guyana partnership is likely to prove to be very significant to the company.

There are other large projects that promise to favorably change the company cost structure.

This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Learn More »

Artem_Egorov/iStock via Getty Images It was not too long ago that “everyone” seemed to think that the Exxon Mobil (NYSE: XOM ) dividend was in danger. Now, all of a sudden there are hopes of a dividend increase. Exxon Mobil has long had financial flexibility to do as it wishes. Yet investors scream when any company “borrows to pay the dividend” no matter the financial strength or the total picture. Oftentimes a proliferation of panic articles and predictions marks a market bottom. That proved to be the case with Exxon Mobil. Now there is a similar ignorance of the total picture yet again to push for a dividend increase. Most likely, the dividend will increase. But that increase will be restrained by the profit opportunities offered by the company projects.

Management has noted that the company should double profits by 2025. Source: Exxon Mobil Third Quarter 2021, 10-Q.

Far more important is the improvement in cash flow. Earnings is comfortably in the black as well. But it is now clear that the company can easily spend what it needs to develop priority projects while paying a dividend. Long term debt is a whole (roughly) $44 billion and it’s declining. It was only a year ago that many wondered if the company could ever pay that level of debt. Now it is obvious that the debt level is conservative.

The lenders are also attracted to the attributes of the Guyana partnership. This kind of discovery often causes the debt market to “loosen up” at the realization of extreme profitability once this project really “gets going” in terms of cash flow acceleration. Source: Hess Corporation September 2021, Investor Presentation.

Exxon Mobil recently announced a 21st discovery that is not shown above. That discovery, combined with the discoveries that have been added to the map, have caused the partners to raise the amount of oil to be recovered to more than 10 billion barrels.

Furthermore, this project will be generating more cash flow when the second platform begins oil production in 2022. What needs to be realized is that the partners figure the discoveries so far will support at least 10 platforms. That means that this project (at 200,000 BOD per platform) could be producing 2,000,000 BOD for the partnership sometime around the end of the decade. That is a significant quantity (even though the company only receives its share) even for a company as large as Exxon Mobil.

Yet neither the stock nor the stock of partner Hess (NYSE: HES ) has really responded to the potential cash flow from that (likely) very profitable production. One of the things that the partners and a fair amount of industry have stressed is that offshore costs are currently at a cyclical low. There is therefore a permanent cost advantage to develop this project to the extent possible by using those cheap costs. Estimates of savings have varied widely. But some of those estimates of savings approach 30%. That would be a very material cost advantage for a project of this size. Low costs of large projects often turn into a competitive moat when those costs cyclically rise as the competition also completes production projects in the area.

Exxon Mobil, as the partnership operator, currently has 6 drill ships operating off the coast of Guyana. The string of discoveries announced so far suggests that there are a lot more discoveries in the future of this partnership. Should offshore costs continue to remain low, there is every possibility that Exxon Mobil would increase activity as the cash flow from the partnership rises. The potential profit opportunity of the joint venture appears to outweigh the opportunity to return more profits to shareholders. Source: Murphy Oil September 2021, Investor Presentation

But Exxon Mobil is not relying upon Guyana alone to help make the company cost structure more cost competitive. The company will be drilling some wells in Brazil (the first of which should begin drilling soon). Any large project like this can take a few years to determine the profit […]

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