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Morningstar | Exxon Is Ramping Up Investment for the Future

ExxonMobil is breaking with the integrated pack that have committed to restraining capital spending and increasing cash returns to shareholders. Instead, Exxon is planning to ramp up capital spending with the goal of doubling earnings and cash flow from 2017 levels by 2025 and delivering a return on capital employed of 15%, compared with 9% in 2018. While investors have been clamoring for greater capital discipline from integrated oils, Exxon’s view is it holds a host of high-return projects that can leverage its superior integrated model and thus warrant investment. Arguably, the reasoning is sound in our opinion. We have long argued, and the historical returns support our contention, that Exxon is the highest-quality integrated overall (operating and assets) and that its downstream and chemicals segments are key differentiators. It stands to reason it should invest to maximize those advantages. However, integrated oils have a spotty record of delivering on long-dated volume and return targets. Execution risk is thus high. That said, Exxon is one of the better operators and developers in the world, and its plan includes a high portion of operated projects, increasing the chances for success, in our view. Also, while oil prices are likely to be volatile during the next seven years, it can cover its spending requirements and dividends at $40/barrel, ensuring their safety.The upstream segment will lead the charge, with earnings growing threefold and new investments seeing 20% return on capital employed. Exxon has bolstered its portfolio over the last few years through discovery (Guyana) and acquisition (Permian, Mozambique), and these new resources will contribute the bulk of its estimated 1 mmboe/d in net production growth. Its 2025 targeted production of 5 mmboe/d represents an 3% CAGR--not necessarily a gaudy figure, but audacious, given volumes have remained flat at 4 mmboe/d over the past 10 years. Exxon expects to double both downstream and chemical segment earnings by 2025. Investments will focus on leveraging its integrated model, improving yields, and adding capacity to capitalize on low-cost U.S. feedstock and serve growing Asian demand.