Simply put, historically the big advantage for the major integrated oil companies has been that they’re large and financially stable enough to invest in new upstream oil and gas development projects when commodity prices are low and most producers are cutting back.
Historically, this counter-cyclical investment has allowed the majors to take advantage of low services and project development costs at the bottom of the cycle and then go on to produce additional volumes of oil and gas as commodity prices recovered.
In this cycle, however, Exxon Mobil stands out among the majors in that it continues to follow this counter-cyclical strategy even as most are focused primarily on cutting spending to shore up free cash flow.
Right now, Exxon isn’t getting much credit in the stock market for this strategy; however, we believe that will change as oil prices recover to the $50/bbl region in the coming year.
Global spending on exploration is at multi-decade lows. However, as the global economy recovers, energy demand will pick up again and, without billions in investment in new projects, supply won’t be sufficient to keep pace with demand.
We continue to see XOM well-placed to benefit from this shortfall as it’s scheduled to bring a series of new projects online between 2020 and 2025.
Of course, in the near-term, advancing all these projects requires capital and, with commodity prices depressed through most of 2020, the company has borrowed money to fund its capital spending this year.
That said, we believe the company has already successfully managed through the most treacherous phase of this cycle and has committed to maintaining its dividend without adding debt beyond Q2 2020 levels.
Management has identified roughly $15 billion worth of less-strategic mature oil and gas producing assets around the world and already is shopping 11 specific assets.
By replacing mature assets with faster-growing cheaper-to-produce new projects in countries like Guyana, XOM should be able to raise additional capital while actually improving the economics of its operations.
With a 9.4% yield that’s sustainable even with oil near current levels plus exposure to a longer term recovery in oil prices and demand, XOM rates a buy.