It hasn't been easy to own energy industry Goliath ExxonMobil Corporation (NYSE:XOM) over the last decade. Despite a 16.5% gain so far in 2019, the stock is only up 17% over the past 10 years. Chevron's stock, probably the company's closest peer, has nearly doubled over that span. But don't give up on Exxon -- there's a silver lining starting to show, despite the clouds that have led investors to avoid the shares.
What's wrong with Exxon?
In many ways it looks like Exxon lost its way under the stewardship of former CEO Rex Tillerson. That shows up very clearly in the company's production statistics and its return on capital employed metrics. ROCE is basically a measure of how well a company uses its shareholders' cash.
With regard to ROCE, Exxon has historically been at or near the top of the industry. But over the last 10 years it has fallen to just the middle of the pack. On the production front, Exxon has been in decline for a few years: In 2016 production fell 1%. In 2017 it dropped 1.7%. And in 2018 production declined a painful 3.8%. With production continuing to fall and ROCE going from industry-leading to simply middling, it's no wonder investors are worried about Exxon's future.
These two facts are a big part of why Exxon's shares have languished and now yield 4.1%, the highest level in more than 20 years. But income investors should dig a little deeper into the story here, because there's good news starting to show up if you look beneath the headline numbers.
Getting better at last
With an over-$330 billion market cap, Exxon is a giant company. You don't turn ships this size on a dime; it takes time. The company has a long-term plan to double earnings by 2025 that it is currently executing under Tillerson's successor Darren Woods. That date is still a long way away, and there are still a lot of investments to be made -- however, the disconnect between where Exxon is going and where it currently is today is opening up an opportunity for investors who can think long term.
It's important to note that Exxon is a conservatively run company and should have little problem putting its plan to work no matter what oil prices do between now and 2025. For example, long-term debt makes up less than 10% of the oil giant's capital structure. That's at the low end of the industry, and affords Exxon a lot of leeway to keep spending even if oil prices fall in their often-dramatic fashion (like the swift oil bear market of late 2018). And early results for the 2025 plan, which was announced in 2017, are starting to show progress toward the long-term goal.
With regard to ROCE, Exxon is looking to push the statistic up into the mid teens over time. Although the company's ROCE is still sitting in the middle of the pack, it has started to pick up. To put a number on that, ROCE was in the low single digits at the start of 2017, but ended 2018 just above 10%. Rising oil prices have helped, but so has the company's move to take greater control of the projects in which it is investing. Over time, being more involved should allow the company to put its expertise with giant energy projects to better use. Look for Exxon to continue to show improvement here as management refocuses its portfolio around industry-leading investment opportunities.
Production, meanwhile, isn't as bad as it looks, with early results from just one of the company's key growth projects already starting to push the number higher. Expansion in the company's onshore U.S. oil drilling segment helped it increase production between the second and third quarters of 2018. There was another increase between the third and fourth quarter as well. That turn higher wasn't enough to offset the full year decline, obviously, but it shows that Exxon's production is starting to move in the right direction again.
Equally important, the energy giant just announced that it was able to add a massive 4.5 billion barrels of oil to its reserves in 2018. That's notably based on successful exploration efforts at its longer-term investments, largely in offshore drilling, leading to a replacement rate of more than 300%. That means that Exxon found over three times as much oil in 2018 as it drilled, and sets the company up for a robust future. It now has 17 years worth of production ahead of it at current production rates.
The end is nigh
It's probably too soon to say that Exxon is back to its old form, but it is clearly starting to show important progress toward its long-term goals. The company's languishing price and high yield, meanwhile, don't appear to be factoring in the successes it has achieved over the last year or so. If you can think long-term, now could be a great time to grab this 4% yielding oil giant while short-term investors are still fearful.