One of the reasons why investors are drawn to Exxon Mobil (NYSE:XOM) has to be its size. Exxon stock represents ownership in one of the largest energy firms on the planet. XOM has assets that cover production, pipelines and downstream/refining facilities.
If it’s a hydrocarbon, then XOM, at some point, touches it in its system. This scale produces steady and enviable cash flows and profits… or at least it did.
Since the oil downturn, Exxon stock has been less reliable in terms of its profits and share price growth. Its last earnings report is a testament to that bounciness. The question is, whether or not, XOM stock can get back on a steady path to growth and regain its mojo.
The answer to that question is less than clear.
A Series of Big Write-Downs and Lower Profits at Exxon
During the boom times, Big Oil made a series of big bets. After all, when oil prices are north of $100, it makes plenty of sense to start drilling in the deep arctic waters or untapped shale regions. Exxon was no different. The unfortunate thing is that as energy prices collapsed and have stayed persistently low for several years now, these sort of high-gamble, high-oil-price bets have soured. For XOM — as well as many of its integrated rivals — these big projects were vital to its success in replacing lost reverses.
And many of these projects are turning out to be busts.
Take Exxon’s Russian deals, for example. The promise was huge, as Russia’s untapped arctic reserves would have meant plenty of much-needed oil production for XOM. However, tapping these fields required billions of dollars’ worth of CAPEX spending. However, thanks to falling oil prices — which makes drilling in such harsh conditions uneconomical — and rising economic sanctions against Russia, Exxon has recently abandoned the project and took a $200 million write-down on its involvement.
And there were other mishaps at XOM as well. In total, the integrated giant has had to deal with billions of dollars’ worth of write-downs and its output has dropped in five of the last six years. Meanwhile, profits have taken a tumble as well. For all of 2017, Exxon reported profits of $19.71 billion. While that is still more than some nations’ GDPs, it’s still much lower than the $32.52 billion it earned in 2014. Without tax benefits, it’s E&P/exploration division would have lost money last year.
A New Aggressive Growth Plan for Exxon
The problem for Exxon is its size. It really takes a lot to move the needle. Tacking on even 10,000 barrels worth of production a day doesn’t do anything for its bottom line. It takes big projects to get big profit and production growth.
To that end, new CEO Darren Woods is once again turning on the spigot with regards to CAPEX spending. This year, Woods’ announced that Exxon would spend about $24 billion on CAPEX across chemical, upstream and downstream businesses. This follows the $23 billion it spent last year. In 2019, XOM will spend $28 billion, while the energy stock will spend around $30 billion per year in the 2020-25 period.
Most of the money will be spent on five projects that are predicted to be about 50% of upstream earnings. This includes deepwater projects in Guyana and Brazil, shale oil production in the Permian Basin, as well as liquefied natural gas (LNG) projects in Papua New Guinea and Mozambique.
If oil holds at $60 per barrel, Exxon’s average return on capital employed would increase to about 15% by 2025. That’s about double today’s levels. As for profits, XOM expects to see a 135% jump in profits by 2025, as these projects roll out and oil stays at $60 per barrel. If it falls to the $40 level, earnings will only increase by 35%.
A Lot Risk for Exxon Stock Again
Exxon is truly facing a conundrum. Like before, it has to spend big in order to get results. However, it’s going to take a long time and a lot of money to realize any sort of profits from these mega-projects. And like before, there will be plenty of slow growth and billions in CAPEX that will weigh on its results, potentially for years. The hope is that, unlike its forays into Russia and ultra-deepwater, these gambles pay off. No one would have guessed that oil would have crashed so hard and stayed low for so long.
So, where does that leave investors in XOM stock?
Well, the smooth ride straight up with ever-increasing dividends and profits may be a thing of the past. While owning Exxon stock is still a valid choice for portfolios, it might not be the conservative pick it once was. The variability in its results — and the potential disappointments — are here to stay.
That’s something to think about before pulling the trigger on shares of the firm.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
