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Despite the coronavirus pandemic causing a paradigm shift for policymakers by reviving their focus on non-conventional sources, Exxon Mobil’s future cash flows remain highly dependent on crude oil prices as well as high return upstream investments.
Considering $50/bbl of Brent and low refining margins, the company projects its operating cash flow to increase from $30 billion in 2021 to around $35 billion in 2025, primarily driven by new upstream investments.
Notably, the company is targeting projects that can generate positive returns even at a benchmark price of $40/bbl.
The company expects to generate $30 billion of excess cash through 2025, a bit higher than the $20 billion increase in long-term debt due to dividend payouts in 2020.
Below are key drivers of Exxon's value that present opportunities for upside or downside to the current Trefis price estimate for Exxon Mobil:
For additional details, select a driver above or select a division from the interactive Trefis split for Exxon Mobil at the top of the page.
Exxon Mobil Corporation (XOM) is the largest of the vertically integrated oil majors, as well as the largest publicly-traded corporation in the world by revenue. It was created on November 30, 1999, by the merger of Exxon and Mobil. The company has several divisions and hundreds of affiliates, including Exxon Mobil, Exxon, Esso, and Mobil.
The firm generates the majority of its income from liquid and natural gas sales, with earnings of $14.3 billion in 2019. The geographical diversity of Exxon Mobil's exploration and production (E&P) activities make it less vulnerable to the regional production uncertainties that plague the industry. The company is also an international leader in the downstream refining industry with over 5,000 owned/leased retail stations and 4.7 million barrels per day of refining capacity at the end of 2020.
Crude Oil and Natural Gas Liquids (NGL) production is the most valuable division for the firm for the following reasons:
Proved reserves is an extremely critical metric for an oil and gas exploration and production company. It represents the total quantity of technically and economically recoverable oil and gas reserves owned by the company at a given point in time. It directly impacts the company's production growth outlook. At the end of 2017, Exxon Mobil's total proved reserves stood at over 21.2 billion oil-equivalent barrels. This equates to more than 20 years of reserve life at last year's average production rate. These reserves are evenly distributed between liquids and natural gas, and represent a diverse and global portfolio.
Exxon Mobil is the world's largest public integrated oil and gas company by market capitalization. According to our estimates, on an average, the company generates around 40% of its total free cash flows from downstream refining and chemicals operations. These relatively stable streams of cash flows partially insulates the company from the volatility in global crude oil prices. Because of its integrated business model, the company is able to fund its long-term, capital-intensive upstream projects even during commodity down cycles.
While Exxon’s total hydrocarbon production has remained relatively flat over the last decade, its capital expenditures have soared from around $17.62 billion in 2005 to over $30.86 billion in 2015. This is a clear indication of how difficult the oil drilling business has become over the years. This has been primarily due to the increasing complexity of upstream projects. Various oil companies have embarked on different projects to extract oil such as deepwater, gas to liquids (GTL), oil sands, etc. This has led to longer development timelines which have, in turn, resulted in higher costs. However, the sustained low crude-oil price environment has led to Exxon re-evaluating its capital expenditure strategy. The company reduced its capex to around $23 billion in 2017 and plans to spend around $22 billion in 2017. Going forward, the company aims to increase its capital investment around $25 billion in 2018 and to $31 billion by 2025.
It is estimated that a large part of the world's oil reserves have already been discovered. Recent statistics have indicated that global consumption has been outpacing reserve additions. Peak oil is a commonly used term to describe the point at which world oil output will reach a maximum and decline afterward.
However, many institutions such as the International Energy Agency (IEA) believe that peak oil will not occur for another 25 years at the very least. Many governments across the world are promoting alternative energy measures to ensure that the supply and demand of energy will be met at all times to come.
Exxon, and state-owned, Qatar petroleum, plan to invest $10 billion to extract natural-gas from the Sabine Pass. The LNG will eventually be processed at the joint owned regasification facility in the area, and end up on the export market. Analysts expect America's natural gas exports to triple over the next 4-5 years.
Due to limited underlying growth in product demand, there has been an increase in recent years towards increasing the complexity of refineries rather than expanding capacity. In the U.S., no new refineries have been built since 1980, however, improvements in process design and technology have seen capacity increase around 1% per year.
The early refineries that were established were mainly used to process light sweet crude resulting in an increase in demand for light sweet crude. As a result of higher oil prices in recent times, heavy crude oil is becoming more economically attractive. In addition, the interest in the development of new cost effective methods for extracting and transporting heavy crude oil for refining into valuable light and middle distillate fuels is also increasing.