Exxon Mobil: Money Management

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Exxon Mobil (NYSE:XOM) management had some interesting answers to finance questions now that the industry recovery is underway. There was a question about repaying all the debt. But management indicated that they were happy with debt levels. Therefore, they were not rushing to repaying debt. Instead, the pandemic taught them to carry more cash. Therefore, in the future, the cash balance will be in the $20 billion to $30 billion range.

The reason that this happened was that the company efficiently ran with a low cash balance and then floated commercial paper as needed. Low interest rates probably made this a cost-effective strategy. Then the pandemic hit, and the commercial paper market was nothing close to normal. Management aims to not be exposed to that situation again at least for the near future.

Debt is already at the low end of the range given by management. The reason is that a company as financially strong as Exxon Mobil also usually performs very well throughout the industry cycle. It was noted that there was a whole four quarter and fiscal year loss around the time of the pandemic. However, the pandemic was probably not a recurring item.

So there really was no need for the market to panic about debt levels. Then again, panic Mr. Market did panic as if Exxon Mobil would never repay debt. This was happening despite the company participation in a world class project like Guyana. That project alone likely justifies a fair amount of debt due to the industry leading profitability of the project. Instead, all that panic about debt levels should be taken as a sign that an industry cyclical bottom is either around the corner or just passed. Instead of a negative, those articles are likely an indication that it was time to consider investing in a company like Exxon Mobil.

But with all the growth projects “on its plate” this company may still be a decent investment for investors to consider.

Demand Outlook

Management also spent time on how gasoline demand usually drops in the second quarter. That seasonal pattern may not repeat due to the disruptions caused by the war.

The other thing that is increasing demand has been a rush by much of the world to increase inventories at a time of high prices no less so that economies are not impacted by shortages caused by the war. But that action by itself causes stronger demand on a temporary basis. The projected shortages actually become larger shortages as countries store oil “just in case”.

As expected, management does have several turnarounds in place for the second quarter. There is also the usual shift by refineries from the winter product mix to the summer product mix. That makes the second quarter not real comparable to the first quarter. But it is comparable to the same quarter of the previous year because the seasonal switches traditionally occur near or at the same time.

Production

There has been a fixation on production by the market. Management mentioned some winter issues that decreased first quarter production during the conference call and in the earnings press release. Those kinds of issues are not predictable but do happen from time to time. Usually, as was the case here, that production decrease related to weather is a passing event that usually recovers within a few weeks or months at the most.

This management did mention that they intend to grow Permian production 25% for the year. This mirrors the plan of some other companies. The oil and gas industry is a very large industry where no company controls all that much (as a percentage of the total) production. Furthermore, much of the industry is made up of private companies that usually do not report all that much. Therefore it is very hard to gauge whether or not there will be production growth throughout the country.

In the favor of production growth is the fact that many private companies are conservatively run and are therefore ready to take advantage of a period of strong prices like the current period. Another factor is that a lot of high-cost shut-in production will be producing during a period like the current time because it is profitable for high-cost producers to produce. That production also shuts back down when selling prices weaken considerably.

Earnings Goals

Management had what seemed like aggressive earnings goals when this was first announced a while back (at least a year). Now the market view has changed considerably.

Exxon Mobil Presentation Of Profitability Increase At Considerably Lower Oil Prices (ExxonMobil Investor Day Presentation March 2022)

This recovery is strong enough thanks to some unforeseen events that management is likely to surpass their original profitability goal due to the unusually strong commodity price environment.

However, management also cautioned during the conference call that the focus remains upon low costs because there will be another industry downturn. This industry does not stop being cyclical because there is a war and prices are now over $100 for oil in at least some places. The focus on low and reducing costs is welcome. If past history is any guide, the cost reduction will “pick up steam” during the next cyclical downturn.

Big Projects

This management tends to divest projects when they get to a certain age. Someone else can then deal with rising production costs. Therefore, the increase in agility from the divestment program combines with the low-cost new projects to provide a faster movement towards low-cost goals.

Hess Corporation Presentation Of Guyana Discoveries And Lease Map (Hess Corporation April 2022, Investor Presentation)

One of the largest projects in the industry has to be the Guyana Partnership where both Exxon Mobil and Hess (HES) are partners. Exxon Mobil mentioned in the conference call that the third platform is running ahead of schedule. Therefore, startup of the third platform can be expected in fiscal year 2023.

The higher oil prices are already having an effect on the long depressed offshore industry. This is one of the more profitable projects offshore and therefore proceeded with development despite some industry challenges over the last year.

Nonetheless, the announcement of five discoveries is already about as many as were made in the total last fiscal year. The further announcement of the third FPSO running ahead of time points to a ramp-up of activity thanks to the strong commodity prices.

This is one of the few large projects that is able to begin the development of the discoveries made offshore. Therefore, some favorable pricing is still available to the partnership. The strong commodity pricing means that offshore activity will inevitably increase. Therefore, the recovering ability of offshore vendors will eventually erase any pricing advantages. But for the time being, this partnership can bring on new production at decent costs while enjoying the relatively fast payback of the very strong commodity price environment.

The Future

Exxon Mobil forecast decent production growth for some key projects like the Permian and Guyana. Yet overall production guidance is down slightly from the last fiscal year. This likely results from the lack of activity during the pandemic even though the company had and continues to have several growth projects underway.

With the pandemic fading into the background. The production recovery is clearly underway with the big growth projects leading the way. It does appear that the Guyana partnership is “picking up the pace”. Strong commodity prices often cause that to happen even with “spending discipline”.

The Guyana partnership is likely to have the largest long-term effect on the company because of the amount of discoveries made and the prospects for a lot more discoveries. It is only going to take a few years for Guyana to represent 10% of the company production. After that, any partnership growth is likely to be significant to a company the size of Exxon Mobil.

That makes Exxon Mobil a likely long-term growth and income prospect. The further growth prospects usually come from the fact that Exxon Mobil attempts to diversify a big discovery like Guyana by considering a refinery or other diversification attempts. The company has done that in the past as management prefers to sell high end products rather than “just oil”.