Company Reports

While many of its peers are diverting investment to renewables to achieve long-term carbon-intensity reduction targets, ExxonMobil remains committed to oil and gas. It has responded to calls to bring in more outside voices to its board and announced emission-reduction targets. It's also investing in low-carbon technologies, but these efforts are measured and keep oil and gas production at the core. While this strategy is unlikely to win praise from environmentally oriented investors, we think it's more likely to be more successful and probably holds less risk.

Exxon's first-quarter adjusted earnings fell to $8.2 billion from $11.6 billion the year before, falling slightly short of market expectations. The decline was largely attributable to lower gas prices and narrower refining margins, both of which fell back toward historical averages from highs last year.

Israel has launched strikes against Iran in retaliation for an attack on April 14 (see our April 15 note for more analysis). The limited scope of Israel’s attack, which also included targets in Syria and Iraq; Iran's subdued response; and the ample warning Israel provided confirm our view that both parties wish to de-escalate tensions. We’d characterize this as a de-escalation attack. This view is in line with broader US and Group of Seven goals.

We believe the Iranian drone and missile attack on Israel over the weekend places some additional stress on the oil markets. However, the ample warning from Iran ahead of time publicly and privately amid rising geopolitical tensions means the attack was already reflected via a higher geopolitical risk premium in oil prices, in our view. We attribute nearly all of the increase in oil prices to around $91 a barrel from the mid-70s in February to geopolitical concerns versus supply risks. On the supply side, Saudi Arabia and OPEC+ have about 5 million barrels per day of supply—if not more—that can be returned to the oil markets if prices were to overheat and spike well above $100 a barrel. We expect there to be more downside risks than upside at the moment to oil prices. In fact, we see higher potential to touch $75 by the end of 2024 versus a sustained movement beyond $100 a barrel.

While many of its peers are diverting investment to renewables to achieve long-term carbon-intensity reduction targets, ExxonMobil remains committed to oil and gas. It has responded to calls to bring in more outside voices to its board and announced emission-reduction targets. It's also investing in low-carbon technologies, but these efforts are measured and keep oil and gas production at the core. While this strategy is unlikely to win praise from environmentally oriented investors, we think it's more likely to be more successful and probably holds less risk.

OPEC announced that its voluntary cuts due to expire at the end of March have been extended until the end of June. Since oil markets remain weak, we had expected OPEC and its allies to extend the voluntary cuts for another quarter. The 2.2 million barrels per day in voluntary cuts, largely shouldered by Saudi Arabia and to a lesser extent Russia, were originally implemented as a temporary effort last year but have been extended several times as the market has remained oversupplied, in our view.

Exxon's fourth-quarter adjusted earnings fell to $10.0 billion from $14.0 billion the year before but exceeded market expectations. The decline was largely attributable to lower oil and gas prices and weaker refining margins. Adjusted earnings exclude a $2.0 billion impairment charge related to assets in California, where regulatory hurdles have prevented operations from restarting.

Angola announced that it will leave OPEC in what we think is more of a blow to the group’s unity than a material impact on the overall oil markets. The timing is not ideal, as OPEC+ is struggling to defend oil prices. Angola’s recent production level of about 1.2 million barrels per day is only about 2% of the total output of OPEC+. The imminent addition of Brazil (3.8 million bbl/d of oil production), while not subject to a quota, helps offset this loss. We had suggested in our Nov. 30 note that Angola's departure was a possibility, since the country had immediately said it would produce above the 1.11 million bbl/d quota set for it at the last OPEC meeting.

With its annual guidance update, Exxon management increased its capital expenditure guidance by $2 billion annually to account for higher low carbon spending in lithium and carbon capture. However, it left intact its earnings targets for 2027, slightly increasing its 2027 breakeven level and reducing its anticipated level of returns but still implying one of the greatest growth rates among its peer group. This growth outlook, combined with the widening discount to our fair value estimate in the wake of the Pioneer acquisition announcement, makes Exxon one of the best opportunities among integrated oils.

Our key takeaway from the latest OPEC meeting is that the internal member dynamics are highly divisive and chaotic. We don't anticipate this to bode well for the overall oil markets, as investors have less certainty and trust with regard to expected OPEC+ volumes delivered to the market, putting upward pressure on prices. However, even allowing for that uncertainty, we believe the production cuts of 896,000 barrels per day are likely to keep the market in a supply deficit or close to one, keeping prices in what seems to be OPEC+'s preferred band of $80-$100/bbl for the time being. However, we do expect Saudi Arabia will likely need prices to average $100/bbl over the next five years to support its more than $1 trillion investment in Saudi Vision 2030.

While many of its peers are diverting investment to renewables to achieve long-term carbon-intensity reduction targets, ExxonMobil remains committed to oil and gas. It has responded to calls to bring in more outside voices to its board and announced emission-reduction targets. It's also investing in low-carbon technologies, but these efforts are measured and keep oil and gas production at the core. While this strategy is unlikely to win praise from environmentally oriented investors, we think it's more likely to be more successful and probably holds less risk.

Lithium producer stocks fell on ExxonMobil's announcement that the company is planning to enter the lithium production industry through the development of a lithium project in the U.S. state of Arkansas. While Exxon provided little details on its plans, the company said it aims to begin lithium production in 2027 and produce around 100,000 tons per year by 2030.

Exxon's third-quarter earnings fell just slightly short of market expectations as adjusted earnings fell to $9.1 billion from $18.7 billion the year before. Earnings fell across all segments on lower oil and gas prices and weaker refining and chemical margins. Natural gas prices registered the largest declines, falling from levels well above historical ranges the year before, while chemical margins remained below historical ranges.

ExxonMobil officially announced intentions to acquire Pioneer Natural Resources in an all-stock deal slated to close in the first half of 2024. Exxon will offer 2.3234 shares per one share of Pioneer, which, based on our Exxon fair value estimate of $118, implies a $274 per share valuation for Pioneer. This represents a 35% premium to our stand-alone Pioneer valuation of $203 per share and an 11% premium to the market-implied valuation of about $247 per share (based on Exxon’s Oct. 11 closing price). Our stand-alone valuation incorporates a $60/barrel oil price assumption over the long run, whereas the market likely incorporates a long-term outlook closer to $70/barrel on average, which is not unreasonable, in our view. We maintain a more favorable outlook for ExxonMobil than the market, however. At the time of writing, shares trade at a roughly 10% discount to our ExxonMobil fair value estimate. We’re confident the transaction will proceed as planned and raise our Pioneer fair value estimate to $274 following the announcement. Our narrow moat rating is unchanged.

ExxonMobil confirmed prior Wall Street Journal news reports by announcing on Oct. 11 its intention to acquire narrow-moat Pioneer Natural Resources in an all-stock transaction valued at $59.5 billion or $253 per share, based on ExxonMobil’s closing price on Oct 5. ExxonMobil shares have been slightly lower since then, implying a per-share value of about $247 based on ExxonMobil’s closing price on Oct. 11 and the exchange ratio of 2.3234 for every one Pioneer share. That is a 22% premium to our Pioneer fair value estimate of $203 per share, which assumes a long-term oil price of $60/barrel. This suggests a modest reduction in our fair value estimate for ExxonMobil once the deal is considered, but that is largely offset by higher oil prices since our last update as well as value assigned to synergies, which nets out leaving our fair value estimate unchanged. The acquisition price implies a long-term oil price of about $70/bbl, which we don't consider unreasonable, suggesting the valuation for Pioneer, while above our fair value estimate, is fair. We see no impediments to the deal closing in first-half 2024 as expected.

The Hamas attack against Israel over the weekend should ultimately not be material for oil markets, in our view. Gaza produces no oil, while Israel produces only a small amount for its own use. However, oil prices were up as much as 5% at one point before retreating, as we think investors are concerned the conflict could destabilize the wider Middle Eastern region, which serves as a transit point for nearly one in every five barrels produced globally.

Exxon's second-quarter earnings fell slightly short of market expectations, but underlying strategic progress continues, leaving the long-term outlook intact. Our fair value estimate and narrow moat rating are unchanged. With shares off their all-time high set earlier this year, we find its valuation compelling. Exxon continues to stand apart in the integrated space, given its potential for cash flow growth during the next few years, which is the result of new projects and cost savings. Meanwhile, it's quickly advancing its low carbon business, as evidenced by the recent deal to purchase enhanced oil recovery/carbon capture-focused Denbury.

ExxonMobil announced the purchase of enhanced oil recovery specialist Denbury in an all-stock transaction for $4.9 billion. The exchange ratio of 0.84 Exxon shares for each Denbury share implies essentially no premium as Denbury shares had risen over the last year on rumors of a potential acquisition. Given the relative size of the deal at about 1% of Exxon's market capitalization, our $118 fair value estimate and narrow moat rating are unchanged.

On June 4, OPEC+ announced about 1.4 million barrels per day of production cuts. Saudi Arabia would cut 1 million barrels per day production cut in July 2023 for one month, though it can be extended, which we consider a realistic cut, while the remaining 400,000 net barrels are aligning quotas to actual production levels, and we’d consider paper barrels. The previously announced 1.6 million barrels per day cut (or about 600,000-700,000 barrels per day allowing for quota underproduction) by OPEC cut in April has now been extended through the end of 2024 from through the end of 2023. Our fair value estimates and moat ratings for our U.S. oil and gas coverage are unchanged following the announcement. We’d flag Equitrans and ExxonMobil as undervalued.

ExxonMobil posted record first-quarter earnings that exceeded market expectations as the company continued to benefit from high oil and natural gas prices, strong refining margins, and contributions from new projects. First-quarter adjusted earnings rose to $11.6 billion from $8.8 billion the year before largely on stronger downstream earnings. Cost savings also contributed as Exxon has now delivered $7.2 billion of savings since 2019 and is on track to achieve its $9 billion target by year-end. Production increased to 3,831 thousand barrels of oil equivalent per day compared with 3,675 mboe/d a year ago, but grew nearly 300 mboe/d excluding divestments and Sakhalin-1 expropriation, thanks largely to growth in the Permian and Guyana.