Exxon Mobil (NYSE:XOM) is targeting serious earnings and cash flow growth in the long-term as it plans to increase production to 5 million barrels of oil equivalents (boe) per day by 2025. But Mr. Market isn’t excited. The stock has since moved into the red. For long-term oriented investors, however, this could be a buying opportunity.
Exxon Mobil did not have a growth story. Unlike its peers, such as Chevron (NYSE:CVX), the company wasn’t targeting meaningful production growth. On the contrary, its production has been tumbling. For the fourth quarter of 2017, Exxon Mobil posted a 3.2% drop in production on a year-over-year basis to 3.99 million boe per day. But earlier this month, Exxon Mobil revealed that it has planned to gradually increase its output to 5 million boe per day by 2025. The news was supposed to give a boost to Exxon Mobil stock. Instead, the company’s shares have fallen by almost 2% since March 7 – the day before the company released its production growth plan.
That being said, there is also a chance that the company’s growth plans may actually drag its earnings and cash flows in the near future – and that’s probably why Wall Street isn’t cheering. That’s because Exxon Mobil has also said that in order to grow production, it’ll have to increase capital expenditure significantly to develop a number of major projects at home and in international markets. As per the company’s forecast, its annual capital expenditure might gradually climb to $30 billion in 2023-25, up almost 30% from $23.08 billion spent last year. That’s in contrast to some of its competitors, such as Chevron, who’ve slashed their capital budgets.
It also doesn’t help that Exxon Mobil has recently released its quarterly results in which it reported weak levels of cash flows. In the last three months of 2017, the company generated $7.4 billion as cash flows from operations which fell short of capital and exploration expenditure of $9.0 billion. This translated into a cash flow shortfall (negative adjusted free cash flows) of $1.6 billion. Moving forward, Exxon Mobil will benefit from the improvement in oil prices, which have increased to $60 a barrel from an average of $50 last year, which may lift its operating cash flows. But the positive impact could be offset by higher levels of capital expenditure. As a result, the company could continue reporting weak levels of free cash flows (or operating cash flows in excess of Capex). This may have a negative impact on Exxon Mobil stock.
That being said, it is important to remember that following the latest update, Exxon Mobil’s long-term outlook is looking better. The company’s production is now projected to climb almost 25% from 3.985 million boe per day produced last year. The increase will come in large part from two major LNG projects in Papua New Guinea and Mozambique, deepwater projects in Guyana and Brazil and growing levels of US shale oil volumes.
The company’s US shale oil assets are already making an impact on Exxon Mobil’s production. Remember, Exxon Mobil was a late entrant in this space but it has amassed significant acreage in the Permian Basin and the Bakken Formation in recent quarters. At the end of last year, Exxon Mobil had 10.6 billion boe reserves in the Permian Basin and Bakken formation. That’s up from just 4 billion boe at the end of 2016. Its production has already grown significantly to 200,000 boe per day and is projected to increase to well over 600,000 boe per day by 2025. Meanwhile, the deepwater and LNG projects, some of which are still in the early stages of development, will start making a meaningful contribution to Exxon Mobil’s production from 2020. As a result, the company’s output will likely climb significantly in the next decade.
Exxon Mobil may continue to struggle in the short-term due to higher levels of capital expenditure. But by 2025, as all of its major projects come online, we’re going to see significant earnings and cash flow growth which will come on the back of strong production growth. The company will also benefit from the improvement in oil prices. Currently, the price of the US benchmark WTI crude is hovering near $62 a barrel. This depicts a gain of more than 20% from last year’s average price of less than $51 a barrel. That’s also going to give a boost to Exxon Mobil’s earnings and cash flows.
As per Exxon Mobil’s estimates, if, by 2025, oil prices continue to hover close to last year’s average, then it could post 105% and 90% increase in earnings and cash flows respectively. This strong growth will be driven in large part by higher levels of production. In a $60 a barrel oil price environment, Exxon Mobil believes that it can grow its earnings and cash flows by 135% and 105% respectively. At $80 a barrel, the earnings and cash flow growth could come in at 225% and 150% respectively.
In short, although Exxon Mobil may struggle in the short-term, it looks well positioned to post considerably higher levels of earnings and cash flows in the long-term. The company’s shares may struggle this year or in 2019, but as Wall Street gets more clarity around the company’s LNG, deepwater and shale oil projects and it reports strong quarterly results, its stock will likely move significantly higher. For long-term oriented investors, therefore, the weakness could be a buying opportunity.