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ExxonMobil: One Big Step Closer to the Goal

By Reuben Gregg Brewer - Updated Oct 8, 2019 at 8:32AM

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In the middle of a big multiyear spending spree, the oil giant's starting to show investors the money.

Integrated oil major ExxonMobil (XOM 0.79%) is looking to spend as much as $35 billion a year through 2025 on capital projects across the upstream (oil and natural gas drilling), midstream (pipeline), and downstream (refining and chemicals) segments of its business. That's a lot of money, especially when you consider that the energy giant's top and bottom lines are heavily influenced by the highly volatile price of oil. To prove it could afford the spending, management made a key promise. And it has just taken a big step toward fulfilling that pledge.   

A tough sector

The energy sector is not an easy place in which to operate. Oil prices are often very volatile. The recent attack on Saudi Arabian oil facilities grabbed headlines and led to a huge price spike, but it really wasn't all that notable a departure from history. In fact, it only took a couple of weeks for oil prices to settle back down toward where they were before that event. When you look at an oil and gas company like Exxon, you obviously have to think about the price of oil, but you shouldn't focus exclusively on this factor. 

Oil rigs with the sun setting in the background

Image source: Getty Images.

Exxon has specifically built its business to be robust amid the ups and downs of the oil industry. For example, it has a rock-solid balance sheet, with a debt to equity ratio of just 0.24 times. That's among the lowest of its integrated peers. And, notably, relatively low leverage is the norm for Exxon.

In addition, its business is spread across three industry segments, which provides balance to its sales and earnings. The value of the company's conservative approach shows up best in its 37-year history of annual dividend increases -- a record that no major peer can match.   

That said, $35 billion a year is a lot to spend. And with oil prices rising and falling dramatically lately, investors are justifiably wondering how Exxon plans to come up with the cash. There are three main options: cash from operations, capital markets via debt and equity sales, and asset divestitures. Although all three will, in the end, likely play a role (selling stock isn't likely, as the company has historically been a net acquirer of its own stock), Exxon recently highlighted plans to divest $15 billion worth of assets by 2021. The proceeds are basically going to help fund its capital spending.

Starting off strong

One of the key things that investors should watch at any company is whether or not management follows through on its promises. Times change and circumstances change, but execution is vital. Exxon just signed an agreement to sell Norwegian assets for $4.5 billion. That's roughly a third of the total planned divestitures and proves that Exxon is serious about living up to the promise it made. Investors should be pleased. 

But there's more at stake here than just $4.5 billion. Exxon has been telling investors for some time that the set of opportunities it has today is the best since Exxon and Mobil merged. That's why it is so willing to spend despite what is a very challenging energy market. 

But that conservative approach is deeply ingrained. It isn't just looking to grow production for the sake of growing production. CEO Darren Woods was very clear on the company's goals during the fourth-quarter 2018 conference call:

[W]e recognize as we bring more attractive opportunities into our portfolio. That gives us an opportunity to trade out some of the existing assets, and the more we bring in and front-end-load the pipeline and we prioritize across the highest value investment opportunities, by definition some will get moved out. As we move those assets and those projects back, we have the opportunity to trade on that.   

Put a different way, Exxon is selling less-desirable assets to help fund investment in projects that management believes are of higher long-term value. There are two goals in one here, noting that financially strong Exxon doesn't need to hold a fire sale or risk selling its crown jewels. This is a strategic effort to raise cash and, at the same time, improve the overall makeup of the company's portfolio. 

XOM Return on Capital Employed (TTM) Chart

XOM Return on Capital Employed (TTM) data by YCharts. TTM = trailing 12 months.

That, in turn, should lead to an improvement in the company's return on capital employed (ROCE). Long a leader on this stat, which shows how well a company puts its shareholders' cash to work, Exxon has fallen to the middle of the pack of late. So this asset sale program is really much bigger than it seems. Getting out of the gate with a $4.5 billion success is a big win for Exxon and its shareholders.

More to come

Clearly, there's more work to do on this divestment plan -- notably $10.5 billion worth of asset sales. But this early deal is a strong indication that Exxon is capable of living up to this promise. That's a very heartening thing to see, even if Wall Street remains unimpressed (the dour take on Exxon is highlighted by the fact that its yield is higher than it has been since the mid-1990s).

Now could be a good time for income investors to look at this iconic name, since the asset sales it is making will not only help it raise some cash for its big spending plans, but also improve the overall makeup of its portfolio. 

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