Exxon Mobil Stock Is Expensive, But Has High Potential

Exxon Mobil Corporation (NYSE:XOM, "ExxonMobil") recently announced the massive acquisition of Pioneer Natural Resources, one of the largest in its history, which we discussed in detail here. The company is the largest publicly traded oil company outside of Saudi Aramco, and recently announced its earnings. As we'll see throughout this article, it's a strong company at a valuation to match.

ExxonMobil Global Scale

ExxonMobil is set apart by its global scale and ability to construct massive projects.

The company has had numerous accomplishments, such as the ramp-up in production from Guyana. It's built its expert refining capacity, and is working on numerous projects with $10s of billions in capital requirements. The company continues to execute in the top percentiles, supported by its strong project history.

ExxonMobil Q3 Earnings

The company generated strong earnings for the third quarter, supported by its production.

The company's production was 3.7 million barrels / day. The company's annualized dividend is $3.8 / share, a roughly 3.5% dividend yield, which costs it $15 billion annualized. That's less than 2Q worth of earnings, with the company's earnings for the quarter coming in at $9.1 billion. That was a double-digit QoQ increase.

The company is continuing to focus on structural cost savings, with quarterly capex at $4.7 billion. CFFO is $16 billion, with free cash flow ("FCF") comfortably in the double-digits. That means an almost double-digit FCF yield for the company helping to highlight its financial strength. The company has minimal debt and can utilize that FCF for strong shareholder returns.

ExxonMobil Pricing

The company's pricing shows the continuous volatility in the industry.

Chemical margins are well below their 10-year historic range. Refining margins have improved QoQ and are well above averages. Crude prices and natural gas prices are within the average, but especially natural gas prices are down substantially YoY. The volatility in the company's pricing shows the benefit of an integrated portfolio.

The company makes more in some sectors and less than others. Overall, minus a massive downturn in the industry, cash flow remains strong.

ExxonMobil Outlook

The company's outlook shows that volatility will remain, but the company will continue to execute on its goals.

Payara will start-up in November, adding roughly 50 thousand barrels / day in high margin production for the company. However, the company has also sold its Thailand and Italy refineries which will impact margins there. Maintenance will be temporarily higher, and in chemicals with more capacity, margins will continue to be compressed.

The company is working to close a number of major acquisitions, including Denbury and Pioneer Natural Resources, which both have a strong focus on long-term growth.

ExxonMobil Pioneer Natural Resources

The company's Pioneer Natural Resources is the largest acquisition that the company has made in decades.

The $60 billion acquisition is expected to provide $2 billion in pre-tax synergies. The company is receiving Midland acreage that it believes is better than its own, with strong integrations to the company's existing acreage. $2 billion synergies per year will help the overall cash flow of the business. The high-margin production guidance is impressive.

The company expects combined Permian production to hit 2 million barrels / day in 2027. The company once aimed for $15 / barrel in Permian production targets, and we expect it to be able to improve on that. At current prices, that means substantial margins and profits.

Thesis Risk

The largest risk to our thesis is that ExxonMobil is priced for a higher oil price environment. Russia's invasion of Ukraine combined with global uncertainty, and a reopening from COVID-19, after years of underinvestment, have all buoyed demand. There's no guarantee that prices will remain higher, and if they decline, that can hurt long-term returns.

Conclusion

ExxonMobil is a giant. Acquiring Pioneer Natural Resources is a great move, although we would have liked to see a cash-heavy acquisition, even in the current interest rate environment. The company could always redirect its massive cash flow to paying down debt, with the combined company outputting almost $50 billion a year in FCF ($35 billion post dividend).

The dilution, for a company known to repurchase shares, indicates to us that ExxonMobil knows its share price is currently potentially on the higher end. We don't find that surprising, the company is reliant on longer term oil prices to justify its valuation and longer term shareholder returns. Still the benefit of synergies along with its asset strength can help in the long-term.

ExxonMobil's ability to drive long-term shareholder returns make it a valuable investment opportunity. Let us know your thoughts in the comments below.

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