Here’s Why The Best Is Yet to Come for ExxonMobil

FAN Editor

ExxonMobil‘s (NYSE: XOM) turnaround is starting to bear fruit. That’s welcome news after a long stretch of relatively weak operating performance. However, this is just the beginning for the integrated energy giant. Here’s what is starting to go right for Exxon and why even-better days are ahead.

What’s been going on?

Continue Reading Below

Weak production results and falling return on capital employed pretty quickly sum up Exxon’s recent problems. Oil production fell 1.7% in 2017 after falling 1% in 2016, and continued to decline through the first half of 2018. Although the declines seem small, they were a troubling sign that all wasn’t right at Exxon. Return on capital employed, or ROCE, a measure of how well a company is putting its shareholders’ cash to work, added to the concern. It, too, was falling, dropping to as low as 3.9% in 2016. Although the entire industry was experiencing declining ROCE, Exxon’s drop brought it from its longtime position at the head of the pack to simply resting in the middle of its peer group.

These were bad signs for the energy giant that had long been held as a best-in-breed investment. The good news is that things have started to change. Return on capital employed started to turn higher again in 2017, with continued gains in 2018. Although Exxon is still just trailing along with its peers, the upturn is a welcome signal that shows it hasn’t suddenly become an industry laggard on this metric. Being average is good for now.

With regard to production, a big shift took place in the second half of 2018. The company’s efforts in the onshore U.S. market, just one of several big investments it’s making, led to a sequential increase in production between both the second and third quarters and the third and fourth quarters. Last year Exxon laid out a goal to more than double earnings (assuming oil is in the range of $50 to $60 per barrel) by 2025. As other investments come on line as it pursues this aggressive growth level, production should continue to be a relative bright spot.

So the first reason to be fond of Exxon right now, besides a robust 4.4% yield and a price to tangible book value that hasn’t been this low since the 1980s, is that management appears to have gotten the giant ship back on course. It was a slow turn, but with a company this size, that’s not surprising.

Where’s Exxon really going?

Exxon has been pretty specific about how it’s going to measure success. To be fair, the nature of the volatile oil industry led the company to provide a range of possible outcomes looking out to 2025. If oil prices are low, in the $40 range, it expects earnings to grow by 35% over 2017 levels. With oil at $60 a barrel, earnings should grow 135%. If oil hits $80 a barrel, then earnings are projected to rocket 225% higher. It also laid out a target for ROCE, with the goal of pushing that metric up into the mid-teens by 2025.

Wall Street will likely get its head around these numbers as they directly address the concerns that investors have been expressing. However, to really understand where Exxon wants to go, you need to listen more closely.

For example, in the fourth-quarter 2018 earnings conference call, CEO Darren Woods noted:

He expanded on this topic later in the call:

In other words, Exxon isn’t looking to just become a better company. It’s looking to be an industry-leading company. Which brings up the next point from Woods:

The quick take here is that as Exxon brings on new projects that are at the forefront of the energy industry, it will be able to sell less desirable assets, improving overall performance and its place within in the industry. The best part is that, with a robust balance sheet (long-term debt makes up less than 10% of the capital structure), it has the financial wherewithal to keep moving forward on its goals no matter what happens to oil prices.

The goal isn’t specific

So why is the best yet to come for Exxon? Because the earnings and ROCE goals it laid out aren’t the real targets. The target that matters is being the best in the industry. Under previous management, that goal appeared to have gotten watered down, leading to some slippage in Exxon’s performance. But Exxon is once again steering toward its historical goal to be the best integrated energy company on Earth. Results in the second half of 2018 suggest the giant ship is turning in the right direction — but earnings and ROCE are just guideposts along the way.

10 stocks we like better than ExxonMobilWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now… and ExxonMobil wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of January 31, 2019

Reuben Gregg Brewer owns shares of ExxonMobil. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Free America Network Articles

Leave a Reply

Next Post

This year's Oscars swag bags include cannabis chocolates

Every year the top Oscar nominees receive swag bags that have included gifts from luxury holidays to sweat-absorbing patches, worth upwards of $100,000. This year, they can calm their nerves ahead of the awards on Sunday with a range of cannabis-infused products that will be included in the goody bags. […]