Why ExxonMobil Is Set for Years of Lackluster Growth

As ExxonMobil's production stagnates the company's earnings are not going anywhere.

Jul 16, 2014 at 2:07PM

ExxonMobil (NYSE:XOM) is no longer a spring chicken. The world's largest publicly traded oil company has been struggling to increase output for some time now as it has become harder and harder to find new low-cost oil reserves.

The company is now set for a period of even slower output growth as it cuts spending and seeks stability over growth. At the same time, ExxonMobil's smaller peer Chevron (NYSE:CVX) is springing into action, ramping up project development, output, and as a result, earnings.

With this being the case, ExxonMobil now appears overvalued.

While ExxonMobil trades at a historic P/E of 13.9 compared to Chevron's 12.7, Exxon's investors are unlikely to see much in the way of earnings growth over the next few years. Traditionally, investors pay a premium for growth.

Two different strategies
For the next few years, Chevron and ExxonMobil are set to pursue two different strategies. Exxon is aiming for stability while Chevron is driving for growth.

Nowhere is this divergence in strategy more obvious than in the two behemoths capital and exploration spending budgets. For example, Chevron is planning to invest $40 billion per annum through 2016, around 5% less than the budget reported for 2013. Meanwhile, ExxonMobil is slashing spending from $42.5 billion last year to $40 billion this year and less than $37 billion through 2017.

Of course, these spending patterns will impact output. ExxonMobil's output currently stands at around 4.2 million barrels of oil equivalent per day (boe/d), slated to hit 4.3 million boe/d by 2017. Chevron's current production is 2.6 million boe/d, but this is expected to jump around 20% to approximately 3 million boe/d by 2017.

Slow growth 
Discounting oil price fluctuations and buybacks, Chevrons earnings should be set to rise 20% over the next three years as production comes onstream. Exxon's earnings will hardly move as production stagnates.

Nevertheless, Exxon is aggressively buying back stock in order to drive up earnings per share (and the company's share price). Excluding the price of oil, which is an unknown and incalculable variable, buybacks are likely to be Exxon's main earnings catalyst going forward.

During 2013, Exxon swallowed just under $16 billion of its own shares, eclipsing Chevron's total buyback of $4.5 billion. In share terms, Exxon's buybacks took 123 million shares off of the market, equaling 2.7% of the shares in issue at the beginning of 2013. This buyback failed to stop a 24% slump in year-on-year earnings per share, although it did soften the blow as net income dropped 27%.

This trend is likely to continue, too, unless the price of oil embarks on a long sustained rally. The only real catalyst for Exxon's earnings going forward will be buybacks.

The bottom line
Over the next few years, ExxonMobil's earnings are unlikely to surge higher. As the company seeks stability by reducing capital spending, output is unlikely to grow; this implies that the company's main earnings catalyst going forward will be stock buybacks.

Chevron, on the other hand, is set for rapid earnings growth as the company's production surges over the next few years.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

 
 

Rupert Hargreaves owns shares of Chevron. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers