Exxon Mobil (NYSE: XOM) investors have had, inarguably, a massively tough several years. They’ve been forced to watch technology stocks fly up, with capital locked up in what once was the world’s largest publicly traded company. A company that looked to be turning it around, with low costs, Permian Basin success, and Guyanese opportunity, was slammed by the effects of COVID-19.
However, the company still has an impressive asset portfolio and the ability to generate immense cash flow. Investors can combine this with an options investment strategy to minimize risk and maximize long-term potential.
Exxon Mobil Recent Guyana Results
Exxon Mobil’s Guyana drilling program is something we’re a big fan, as we’ve discussed before here. However, before we dive into the company’s asset portfolio, the company has made a few major moves here that’re worth discussing.
The first is the company made a non-economical oil discovery in the Kaieteur Block, that it won’t be moving forward with. This is a block adjacent to the company’s incredibly promising Stabroek Block, although initial indication is that the block contained heavier oil than anticipated. Deep-water development with FPSOs is expensive, and the promising play just didn’t have enough oil.
However, it’s worth noting the play does provide additional valuable data about the Kaieteur block, especially the continuation of oil, and the company plan to continue drilling. We expect the company to continue exploring.
In the remainder of the company’s Guyanese projects, the news remains good. The company’s Stabroek block continues to have significant discoveries, such as its recent 18th discovery, “the Redtail discovery”. With an average discovery size of 500 million barrels, the discovery will likely help bolster the company’s reserves.
Lastly, the company is continuing its Guyana development with the approval of its massive Payara project, at $9 billion. The FPSO is expected to eventually produce a staggering 220 thousand barrels / day with ~100 thousand barrels / day attributable to Exxon Mobil. We expect the company’s Guyana production to grow long-term and this is a strong indication.
Exxon Mobil Overall Asset Portfolio
Exxon Mobil’s overall asset portfolio is exciting and the company is continuing to develop it.
Exxon Mobil is progressing its Guyana developments and it expects >750 thousand barrels / day of production here by 2026. Of that, nearly 350 thousand barrels / day will be attributable to Exxon Mobil. The company’s Bacalhau project (a 40% ownership in a 220 kbpd FPSO off of Brazil) is on schedule, along with the other projects.
The company has 3 major avenues of upstream growth. The first is new discoveries and major low cost offshore projects, driven by the company’s expertise, and exemplified by Brazil and Guyana. The next is the company’s continued focus on Permian basin production, where it can produce up to 1 million barrels / day of short cycle low-cost growth.
The last is the company’s continued ventures into LNG, compressed natural gas with the potential to generate low cost and efficient energy. Here the company has exciting projects in PNG and Mozambique. In Downstream and Chemical projects, the company is focused on short-term startups with high efficiency and potential.
The company’s asset portfolio will drive long-term shareholder returns.
Exxon Mobil Financial Picture and Dividend
Exxon Mobil’s financial picture has suffered as a result of the COVID-19 collapse, and investors continue questioning the company’s dividend. That’s something we discussed here.
Exxon Mobil Earnings – Exxon Mobil Investor Presentation
Exxon Mobil has continued significant earnings potential. The company has a more than $160 billion market capitalization with a ~$15 billion annual dividend. The company’s 2010-2019 annual earnings ranges in Downstream and Chemical have been $2-8 billion and $1-5 billion respectively. Chemical earnings were near that, while downstream earnings have long room.
On the bottom end, the company was at $3 billion, at the top end, up to $13 billion. We foresee a big recovery in the next year as a result of COVID-19. However, at the midpoint, $8 billion in earnings is incredibly significant from these businesses, covering just over half of the company’s dividends with significant potential.
The company expects maintaining dividends within the low end of the historic price / margin range, potentially causing a dividend cut. However, on the flip side, the company is clearly at its bottom with long-term potential. The company has significantly reduced capital expenditures, improving its financial potential.
A temporary dividend could hurt the company, but the company has significant long-term potential.
Exxon Mobil Cash Profile – Exxon Mobil Investor Presentation
Exxon Mobil’s cash profile is a key aspect of its financial picture. The last few quarters were the worst of the collapse. The company saw strong negative earnings, but saw cash flow from operating activities at $4.4 billion in 3Q 2020 versus $0.0 billion in 2Q 2020. The company earned some from asset sales, and it expects continued long-term asset sales.
Distributions hurt the company, along with investments and debt / other financing. The company’s 2Q 2020 net debt was $56.9 billion increasing to $60 billion in 3Q 2020. That means a $3.1 billion QoQ debt increase. That’s tough, but it still showed an ability for the company to partially payoff its distributions.
Exxon Mobil Options Investment Strategy
For those looking to invest in Exxon Mobil, we recommend utilizing an options based investment strategy.
Exxon Mobil’s share price is just a hair under $39 / share. For those looking to invest, instead of investing today, we recommend selling cash secured PUTs. Investors can sell cash secured PUTs at a $35 / share price price and a midpoint of roughly $2.85 / share.
There’s two scenarios here. The first is that the price stays above $35 / share. You would keep the $4.89 annualized ($2.85 / share for 7 months). That’s in exchange for putting up $3500, meaning a 14% annualized return. Alternatively, the share price drops and you get your shares at a breakeven price of $32.15 / share.
That’d mean a near 11% yield in dividends alone from the stock at that breakeven price. That means the potential to drive strong returns.
Exxon Mobil Risk
Exxon Mobil’s risk has the potential to generate significant long-term rewards, but the company remains susceptible to margins. Especially into 2021, multiple new COVID-19 vaccines are expected to effectively end the threat of the disease. That will lead to a resurgent demand for energy and support the potential for long-term returns.
However, if prices don’t recover, there’s the potential for significant pain including a cut dividend. These are risks worth paying attention to.
Exxon Mobil has an impressive portfolio of assets. The company recently had a setback in Guyana, but it’s continued to make discoveries and started a new $9 billion project with the ability to produce 220 thousand barrels / day. The company is continuing to develop and work on its other assets to generate significant long-term cash flow.
The company has some risks worth paying close attention to. The company’s financial position has had a difficult few quarters, with debt increases. However, the company’s overall financial picture can remain strong should it continue to do so. We expect that the company will continue to drive long-term results.
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Disclosure: I am/we are long XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.