This oil king has a better future than you think

It has been a difficult decade for ExxonMobil (XOM 2.23%). The major integrated oil company has faced volatility in oil prices over the past 10 years, and the stock has risen just 10% over that time.

But boy, the tide has turned in 2022 – oil prices have skyrocketed and ExxonMobil is about to see its highest earnings in recent memory. The demise of fossil fuels seems further away than some had anticipated, and ExxonMobil is seeing the revival that investors have been waiting for years. Here’s what you need to know.

Lessons from the past

ExxonMobil is an integrated oil company, meaning it operates in various aspects of the industry, including upstream operations like drilling and exploration and downstream operations like refining. Exxon’s exploration activities expose the company to oil prices; the difference between what it costs to extract the oil and the price at which a barrel sells is Exxon’s profit.

Oil prices were over $100 a barrel in the early 2000s and 2010s, and companies like ExxonMobil were spending like drunken sailors on expensive exploration projects. Earning money was easy at the time, and ExxonMobil was sitting on billions in cash against little debt.

Aside from the 2008 financial crisis and the resulting recession, you can see life was good for Exxon below.

XOM Cash and Equivalents Data (Quarterly) by YCharts

The years that followed, from 2014 to today, have been the opposite. They represented some of the most difficult operating environments for oil companies. Not only did oil prices take a hit in 2014, they crashed again during COVID-19, even going as high as negative at one point.

Brent Crude Oil Spot Price Chart

Brent Crude Oil Spot Price Data by YCharts

ExxonMobil is a proud dividend aristocrat, paying and increasing its dividend to shareholders for 39 consecutive years. The company has chosen to maintain this dividend through tough times, borrowing as needed and racking up more than $67 billion in debt by the end of 2020.

ExxonMobil insisted on leaning into the oil price down cycle for a few years in the late 2010s, spending more to increase production. However, the pandemic forced management to rethink its plan and expenses were brought under control.

Spending down, profits up

Exxon spent about $36 billion a year on its business at some point ten years ago. But the technology used to extract the oil has advanced since then, steadily reducing costs and increasing efficiency. Drilling and operating costs in the massive Permian Basin have fallen 35% since 2019, and Exxon’s global breakeven price per barrel could fall from $41 in 2021 to $30 by 2027.

Lower costs have sent cash earnings through the roof now that oil prices are high again. You can see Exxon’s free cash flow hitting $40 billion in the past year below.

XOM Free Cash Flow Statement

XOM Free Cash Flow Data by YCharts

Chief Financial Officer Kathryn Mikells joined ExxonMobil in late 2021. She has emphasized a disciplined approach to spending and plans to repair the company’s balance sheet by paying down debt.

Table of Cash and XOM Equivalents (Quarterly)

XOM Cash and Equivalents Data (Quarterly) by YCharts

It has played out so far; total debt fell to $47 billion in the 18 months since the peak, and the company’s cash balance rose to $11 billion. ExxonMobil is spending up to $30 billion on stock buybacks over the next few quarters. However, expect the company to continue paying down its debt so that it is financially ready for whatever the future may bring.

Another strong dividend

ExxonMobil stock is up more than 40% in the past year, but don’t confuse it with a growth stock. Stocks are catching up with a brutal decade and are still only up 10% in the last ten years.

The company’s historic dividend is where ExxonMobil shines. Investors can expect a dividend yield of just under 4%, and this difficult decade has shown management’s commitment to the payout.

Exxon’s ability to repair its balance sheet will not only give the company long-term flexibility to seize opportunities and weather the next cycle, it virtually guarantees that it remains a dividend-paying stock investors can rely on. For retirees and income-oriented investors, that’s as bright a future as it gets.

About Myra R.

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