Our forecast for this year remains the same — investors will ultimately get more comfortable with higher commodity prices and energy stocks will catch up to them, matching and ultimately greatly exceeding pre-pandemic prices, notes Elliott Gue, editor of Energy & Income Advisor.
And until that happens, Q1 results are showing our recommended stocks are well prepared for whatever comes.
So far in 2021, Exxon Mobil (XOM) is the best-performing supermajor, up more than 45% on a total return basis.
Looking at their quarterly earnings numbers, it’s not hard to see why — unlike most of its peers, the company invested in major new upstream projects straight through the down-cycle, positioning Exxon to expand low-cost production through the coming up-cycle.
In Q1 2021, Exxon generated total earnings of about $2.554 billion from its upstream business (oil and gas production) compared to just $745 million in Q4 2020.
Obviously the most crucial driver of that was the improvement in commodity prices, which accounted for more than $2.0 billion in incremental quarterly earnings, partly offset by a $240 million hit from severe winter storms in Texas and a variety of smaller factors.
The two big drivers of volume increase in the upstream business are the Permian in Texas and Exxon’s world class Guyana asset, where production is up a whopping 70% since Q1 2020.
All told, Exxon generated enough cash in the quarter to cover its cash capital spending of $2.7 billion and dividends of about $3.7 billion while still leaving room for ExxonMobil to reduce debt by $4 billion. For the year as a whole, management left capital spending guidance unchanged at $16 to $19 billion.
With Brent in the low $50s, the company can cover its payout and the high end of its 2021 CAPEX guidance, even if we assume cycle low margins in its downstream (refining) and chemicals businesses.
With Brent closer to $70/bbl right now, the chemicals business already performing well and refining likely to recover as refined product demand picks up this summer, the company is likely to generate billions of additional operating cash flow this year.
Management stated that any cash flow that’s generated due to commodity prices above plan will be deployed to reduce debt.
In addition to that, Exxon announced the sale of its central and northern UK North Sea assets for proceeds of more than $1 billion, part of its process of selling off older, higher cost assets and redeploying that capital on low-cost projects like the Permian and Guyana.
Recall that the main bear case for Exxon was based on the view that the company was borrowing to pay its dividend and fund upstream capital spending.
Indeed, the company did NOT cover its dividend with operating cash flow when commodity prices collapsed, and net debt swelled from under $35 billion at the end of $2018 to more than $68 billion at the end of last year.
However, since that time, commodity prices have entered a new up-cycle and Exxon’s upstream investments are paying off in the form of rising low-cost production.
As a result, net debt is down to $63.3 billion and, should commodity prices remain elevated as we expect, we believe ExxonMobil will continue to reduce debt back below $50 billion by the middle of 2022 while maintaining its current 5.9% yield. Buy Exxon Mobil up to $65.
